Paul Ryan wants to take not only Medicaid, but programs for the poor in general (food stamps, disability insurance, etc) and put them into a block grant for the states. This means giving a fixed appropriation for the states, with no oversight, and gradually squeezing it down.
Unlike Medicaid, where I think there is a good chance of stopping him, I fully expect this one to pass without much difficulty. Squeezing the poor is always popular with Republicans, and with the broader general public.
Thursday, November 17, 2016
Generic Republicans in Power: Medicaid and Medicare
It isn't just Obamacare that is on the line. Although for reasons stated before, I doubt that Republicans will repeal the Medicaid expansion outright (short version: unlike the exchanges, the Medicaid expansion is not having any obvious problems, and reversing it would upset not only poor people who lose health insurance, but healthcare providers not who don't get paid and states seeing large holes blown in their budgets).
But it has been a longstanding goal for Paul Ryan to turn Medicaid (the federal insurance for poor people) into a block grant, and then slowly squeeze it down. What this means is that the federal government, instead of paying a fixed share of states' Medicaid costs, would give states a fixed sum to spend on Medicaid and gradually reduce it relative to current rates. The result would be to slowly starve Medicaid of funds and have more and more people thrown off, but cast the blame onto the states. And, after all, since Medicaid is a program for the poor, it will lack any real political clout to fight the squeeze. Or will it?
You see, among the "poor" who receive Medicaid are recipients of Medicaid Long-Term Care. Many of these are once-middle class people who are unable to take care of themselves and end up in nursing homes. Once their assets are depleted paying for the nursing home, they become poor and have to rely on Medicaid to pay the expense. Long-term expenses take about half of total Medicaid expenditures. Imagine the outcry over the prospect of Granny being thrown out on the street! And, perhaps even more significantly, Medicaid pays for about 43% of total long-term care. Now imagine the outcry from the long-term care industry over seeing so important a source of finance undermined!
All of which means, yes, there will be a political price to be paid for putting a serious squeeze on Medicaid. The question is whether Democrats are smart enough to ensure that Republicans actually pay it, and whether the public will listen.
But it doesn't stop with Medicaid. Paul Ryan is now talking about transforming Medicare (the federal health insurance for people over 65) into a voucher system, i.e., something like the Obamacare exchanges. Of course, that may be just loose talk by Paul Ryan. But then again Tom Price, Chairman of the House Budget Committee is talking about doing something similar. He further proposes to do it as part of the budget process, to avoid any danger of a Democratic filibuster. Some people are even expressing fears that this might get by so fast that Democrats won't have time to build resistance.
I really have trouble seeing it, for several reasons. First and foremost, tampering with Medicare is political suicide. Seriously, during the 2012 election season, even though Republicans were openly running on a proposal to turn Medicaid into a block grant and Medicare into a voucher system, Democrats found that pointing this out went nowhere in focus groups. People simply refused to believe that Republicans would commit political suicide by doing anything so unpopular. Certainly we know that when George W. Bush proposed turning Social Security into a "defined benefit" plan, (i.e., a 401-k) opposition was so fierce that it didn't even make it to the House floor. It surpasses belief for me that anyone could actually slip this by the American public unnoticed. Or that struggling Democrats would let such an obvious godsend pass.
Second, Donald Trump knows that tampering with Medicare is political suicide. That is why he ran for President on an express promise not to tamper with either Medicare or Social Security. Now, he has made a lot of impossible promises and will have to tone them down. In fact, a lot of people have pointed out that Trump's supporters knew that his promises were not possible to keep and could forgive him for not living up to them, so long as he showed he had the right values. But promising to keep his hands off Social Security and Medicare is not an extravagant promise that no one really expects him to keep. It is a basic bedrock that all our previous Presidents have kept up to this point. So my guess is that he will discretely let it be known to Congress that this bill isn't wanted, and that they will comply in the interest of getting their other priorities passed.
Furthermore, if the Republican leadership is so rash as to raise such a measure, they will probably find it lacks sufficient votes to pass. And if it does pass the House, even as a budgetary matter so that Senate Democrats cannot filibuster, it will only take a few Senate defectors to spike it. And if it somehow passes the Senate, I am guessing that Trump would veto it. It violates one of his most important campaign promises. And besides, the veto would get him lots of bipartisan cred and force even his enemies to take him seriously.
But if this measure does make it into law, Democrats know what to do. They have the example of Republicans to follow. The transition will take time. Make it the defining issue of the midterm election. Make it the defining issue of the 2020 general election. Fire up, not just their base, but the AARP and seniors everywhere to call for the repeal of this monstrosity.
The other thing to keep in mind is that when similar but separate things happen at once, they tend to become conflated in the public eye. Many people conflated the Obama stimulus and the bank bailouts because they were both large, controversial spending bills that happened within a few months of each other. During the 2013 debt ceiling crisis and government shutdown, timing both of these at once served Republicans poorly because it meant that the two were conflated in the public eye and most people didn't distinguish between government shutdown and the debt ceiling. And in the recent election it seems unlikely that most people distinguished between Hillary Clinton sending State Department e-mails on a private server, deleting e-mails, or the publication of embarrassing e-mails hacked by the Russians. The point is, putting "Hillary Clinton" and "e-mails" into the same sentence started produced an almost reflexive response in a great many people.
So, let's say Republicans vote to repeal Obamacare and suddenly 20 million people are in danger of losing their health insurance. At the same time, they propose to block grant Medicaid and the long-term care industry starts warning that Granny will be thrown out in the street. And then at the same time, they announce they they are going to change Medicare, probably to make it into something like the exchanges they have denounced as an outrage that must be shut down. The basic message, "The Republicans are coming after your health insurance" is going to be a lot louder than any fine-tuned distinctions between these different programs.
Republicans would be insane to attempt so many unpopular but similar measures at the same time. And the Democrats are idiots if they don't know how to capitalize on it.
PS: Talking Points Memo refers to this as the Medicare "phaseout." Good! Come one, Democrats, that is the phrase to use! Make it poison for them!
But it has been a longstanding goal for Paul Ryan to turn Medicaid (the federal insurance for poor people) into a block grant, and then slowly squeeze it down. What this means is that the federal government, instead of paying a fixed share of states' Medicaid costs, would give states a fixed sum to spend on Medicaid and gradually reduce it relative to current rates. The result would be to slowly starve Medicaid of funds and have more and more people thrown off, but cast the blame onto the states. And, after all, since Medicaid is a program for the poor, it will lack any real political clout to fight the squeeze. Or will it?
You see, among the "poor" who receive Medicaid are recipients of Medicaid Long-Term Care. Many of these are once-middle class people who are unable to take care of themselves and end up in nursing homes. Once their assets are depleted paying for the nursing home, they become poor and have to rely on Medicaid to pay the expense. Long-term expenses take about half of total Medicaid expenditures. Imagine the outcry over the prospect of Granny being thrown out on the street! And, perhaps even more significantly, Medicaid pays for about 43% of total long-term care. Now imagine the outcry from the long-term care industry over seeing so important a source of finance undermined!
All of which means, yes, there will be a political price to be paid for putting a serious squeeze on Medicaid. The question is whether Democrats are smart enough to ensure that Republicans actually pay it, and whether the public will listen.
But it doesn't stop with Medicaid. Paul Ryan is now talking about transforming Medicare (the federal health insurance for people over 65) into a voucher system, i.e., something like the Obamacare exchanges. Of course, that may be just loose talk by Paul Ryan. But then again Tom Price, Chairman of the House Budget Committee is talking about doing something similar. He further proposes to do it as part of the budget process, to avoid any danger of a Democratic filibuster. Some people are even expressing fears that this might get by so fast that Democrats won't have time to build resistance.
I really have trouble seeing it, for several reasons. First and foremost, tampering with Medicare is political suicide. Seriously, during the 2012 election season, even though Republicans were openly running on a proposal to turn Medicaid into a block grant and Medicare into a voucher system, Democrats found that pointing this out went nowhere in focus groups. People simply refused to believe that Republicans would commit political suicide by doing anything so unpopular. Certainly we know that when George W. Bush proposed turning Social Security into a "defined benefit" plan, (i.e., a 401-k) opposition was so fierce that it didn't even make it to the House floor. It surpasses belief for me that anyone could actually slip this by the American public unnoticed. Or that struggling Democrats would let such an obvious godsend pass.
Second, Donald Trump knows that tampering with Medicare is political suicide. That is why he ran for President on an express promise not to tamper with either Medicare or Social Security. Now, he has made a lot of impossible promises and will have to tone them down. In fact, a lot of people have pointed out that Trump's supporters knew that his promises were not possible to keep and could forgive him for not living up to them, so long as he showed he had the right values. But promising to keep his hands off Social Security and Medicare is not an extravagant promise that no one really expects him to keep. It is a basic bedrock that all our previous Presidents have kept up to this point. So my guess is that he will discretely let it be known to Congress that this bill isn't wanted, and that they will comply in the interest of getting their other priorities passed.
Furthermore, if the Republican leadership is so rash as to raise such a measure, they will probably find it lacks sufficient votes to pass. And if it does pass the House, even as a budgetary matter so that Senate Democrats cannot filibuster, it will only take a few Senate defectors to spike it. And if it somehow passes the Senate, I am guessing that Trump would veto it. It violates one of his most important campaign promises. And besides, the veto would get him lots of bipartisan cred and force even his enemies to take him seriously.
But if this measure does make it into law, Democrats know what to do. They have the example of Republicans to follow. The transition will take time. Make it the defining issue of the midterm election. Make it the defining issue of the 2020 general election. Fire up, not just their base, but the AARP and seniors everywhere to call for the repeal of this monstrosity.
The other thing to keep in mind is that when similar but separate things happen at once, they tend to become conflated in the public eye. Many people conflated the Obama stimulus and the bank bailouts because they were both large, controversial spending bills that happened within a few months of each other. During the 2013 debt ceiling crisis and government shutdown, timing both of these at once served Republicans poorly because it meant that the two were conflated in the public eye and most people didn't distinguish between government shutdown and the debt ceiling. And in the recent election it seems unlikely that most people distinguished between Hillary Clinton sending State Department e-mails on a private server, deleting e-mails, or the publication of embarrassing e-mails hacked by the Russians. The point is, putting "Hillary Clinton" and "e-mails" into the same sentence started produced an almost reflexive response in a great many people.
So, let's say Republicans vote to repeal Obamacare and suddenly 20 million people are in danger of losing their health insurance. At the same time, they propose to block grant Medicaid and the long-term care industry starts warning that Granny will be thrown out in the street. And then at the same time, they announce they they are going to change Medicare, probably to make it into something like the exchanges they have denounced as an outrage that must be shut down. The basic message, "The Republicans are coming after your health insurance" is going to be a lot louder than any fine-tuned distinctions between these different programs.
Republicans would be insane to attempt so many unpopular but similar measures at the same time. And the Democrats are idiots if they don't know how to capitalize on it.
PS: Talking Points Memo refers to this as the Medicare "phaseout." Good! Come one, Democrats, that is the phrase to use! Make it poison for them!
Generic Republicans in Power: Obamacare
Now in power, Republicans are having to deal with responsibility. What they could safely propose when it had no chance of occurring will now actually happen if it passes, and they will be held responsible for it. How much they can get away with depends on how much public resistance there is to it.
I am absolutely confident that they will pass a large tax cut, with most of the benefits accruing to the top. That is what they do. They have done it every time they have gotten the chance since 1981, and they will do it again this time. They will be successful because, although there is no great public demand for such a tax cut, neither is there any particular opposition to it either. It is a high priority of the Republican donor class, strongly opposed by the Democratic elite, and a matter of general indifference to the wider public. It will pass without too much difficulty.
Healthcare, now, is a different matter. Plowing Obamacare under and sowing the field with salt has been the top Republican priority ever since it passed, shared by donors and voters alike, and meeting with little resistance by the broader public so long as it was purely theoretical. But now practical reality has struck. The exchanges are running into serious problems, but if the Republican response is simply to shut down the exchanges and kill the subsidies, they will cut off the way 10 million people get their health insurance. 10 million people will be very upset and will flood the airwaves, Congressional offices, town hall meetings and the like with outraged complaints. The pressure will be on Republicans to do something about it.
And then there is the Medicaid expansion. Another 10 million will lose health insurance if the Medicaid expansion is repealed. Some people have suggested that there will be little political cost to that because poor people don't vote often and certainly don't vote Republican. But the outcry won't just be from recipients. Hospital will be outraged at having so many unpaying patients foisted on them. States (many of them with Republicans controlling at least one branch) will be greatly alarmed that the hole being blown in their budgets. Remember all the outcry Democrats receives when they passed Obamacare? Well, the Republicans will be on the receiving end of it if they attempt to take health insurance from 20 million people.
Of course, Republicans realize this. While they may or may not wish to strip 20 million people of their health insurance, Republicans must certainly know that they will pay a steep political price if they do. That is why they all agree on the formula "repeal and replace." The general consensus is that they will pass an early bill repealing Obamacare in its entirety in two years, putting the pressure on themselves to come up with an alternative by then or 20 million people will lose their health insurance. As long as they were out of power, Republicans could propose health savings accounts and insist that if they just limited medical malpractice awards and allowed competition across state lines, costs would fall enough to bring health insurance within everyone's reach. In power, they will quickly learn that a lot of people can't afford health savings accounts, and that being told insurance will be within their reach a few years down the line is not much comfort to a seriously ill person who needs it now. So they will have to come up with something.
The trouble is that any major policy change has losers as well as winners -- and that the losers are a lot louder than the winners. When Obamacare came into effect, we heard a lot from people whose plans were cancelled because they no longer met regulatory standards, and a lot from healthy young people whose rates were increasing to subsidize older and sicker people. We hear a lot now from people who find that high deductibles and narrow networks are seriously limiting the benefit they derive from their health insurance.* So guess what? Republican plans will lead to lower rates for younger and healthier buyers, but higher rates for older and sicker ones. Somehow I don't think older and sicker customers will take it peacefully. It will mean skimpier benefit packages and more people becoming outrages over things that aren't covered. Any while Republicans are now outraged at the high deductibles and narrow networks under Obamacare plans, their plans tend to encourage even higher deductibles and narrower networks. All of this will lead to uproars -- just like the Obamacare implementation led to uproars. One alternative to this might be simply to kick the can down the road and extend Obamacare a few more years to give themselves time to come up with a better plan. I had thought that an extremely likely scenario, but this article convinced me otherwise. It pointed out that if insurers don't know if the exchanges will be there in another year, they probably won't be willing to sell policies on them. So the uncertainty itself could be enough to kill the exchanges.
Of course, to some Republicans simply delaying until the exchanges crash from uncertainty might seem like a great deal. They can destroy the hated Obamacare, see everyone who got insurance through the exchanges lose their coverage, and blame Obama for the outcome. Or maybe not. Maybe the outcry from people threatened with loss of insurance will place the blame on Republicans. Or maybe Republicans can leave the current system in place and just repeal the hated mandate. Then they could induce a death spiral on the exchanges, ensure that everyone who got health insurance there would lose it, and be reasonably able to blame Obama for it. Win all around!
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*Incidentally, that has been my experience as well. I make just enough money not to qualify for a subsidy, but have enough of it vanishing into student loans that health insurance is a serious squeeze. It adds insult to injury to go in for what I thought was routine preventive care and find out that they have found ways to exclude it. And if they are doing diagnostic tests for a possible problem instead of purely routine preventive care, those are charged. On the other hand, insurance does get you a considerable discount for services compared to what the uninsured are charged.
Wednesday, November 16, 2016
Generic Republicans and the Economy: The Limits
So, let us suppose that Republicans really do manage to revive the economy by financing operations by printing money. Isn't that supposed to be one of those things that can't keep on forever? Isn't it supposed to cause out-of-control inflation? Well, yes and no. Certainly, it has done just that many times in the past. On the other hand, funny things start happening when the economy is at the zero lower bound (the place at which cutting short-term interest rates to zero cannot raise the economy to capacity). Japan, at the zero lower bound, has been financing operations by printing money for two decades now, and hasn't even been able to escape deflation. Still, that appears to be largely because the leadership has kept losing its nerve and refusing to keep deficits large enough for long enough. The Republican Party inspires no such fears. So, assuming it keeps financing operations by printing money long enough to get the slack out of the economy and raise inflation to around 4-5%, that approach will not be able to continue forever. I can see several ways it can come to an end.
Premature tightening. The Fed might lose its nerve and tighten too soon, sending the economy into recession and we may find ourselves once again at the zero lower bound, with the Fed having great difficulty reviving the economy. Fortunately, the Republicans will be ready to offer plenty of fiscal support. Don't lose your nerve next time, guys!
Well-timed tightening. The Fed may get it just right. It may wait until inflation starts getting over 5%, then tighten. This will induce a recession,but as soon as inflation falls, the Fed can ease up and the economy will rebound. In this case, recession will take longer to materialize and recovery will be easier. If the Fed is feeling hackish, it may manage to time recovery to coincide with election season and offer maximum benefit to Republican. Still, they will deserve it for a well-executed maneuver. On the other hand, this scenario calls for a level of technocratic skill that Republicans not only generally lack, but are ideologically opposed to, so I am inclined to consider it unlikely.
A soaring dollar and an asset bubble. US interest rise while everyone else's remain flat. Foreign investors flock to the US. The dollar soars. This will no doubt be a source of nationalistic pride, but it will also flood the country with cheap imports and price out our exports -- exactly the opposite of what Trump was campaigning to do. This will probably not upset too many people so long as the US economy appears to be soaring. On the plus side, the US could help pull the world economy out of its rut. On the minus side, the world economy could drag the US down. But the really serious problem is that combining a vast influx of foreign capital with a relaxation of financial regulation (more on that later) is made to order for another bubble and bust. Then again, this scenario could be avoided if right wing populists in other countries see the US economy surging from reckless spending and monetary expansion and do the same.
Too much inflation. We all know what normally happens with countries finance deficits by printing money -- inflation. Japan has avoided that fate because it is at the zero lower bound. We are beginning to move away from it, at least, the Fed has raised short-term rates above zero without tanking the economy. Once we move away from the zero lower bound, our ability to finance deficits by printing money will start to generate inflation. To an extent (Krugman estimates until inflation reaches 4-5%) this will be a healthy development. But what after that? What if the Republicans find a Fed sufficiently hackish to keep expanding in order to expand Republican fortunes? Inflation will continue to escalate. There is another term for continuing such a policy -- macroeconomic populism. It has long been practices by left-wing populists in Latin American countries, and has invariably led to hyperinflation. Rates have hit triple, quadruple, and even quintuple digits. I am not worried about such a thing happening here. The Fed has proven that it can curb inflation by tightening. Well short of that point, people will be prepared to tolerate a short-term recession rather than allow any more inflation.
When will that time come? I have no idea if it will even get to that. But it seems a safe bet that no one will much mind 4-5% inflation. I have no idea how high above that it can go before people get upset. 6-7%? 8-9%? I am reasonable confident that if inflation ever reaches double digits, the pressure will grow to do something about it, and the Fed will. And anyhow, all this is purely speculative.
But even assuming that we get the macro right and that the economy returns to a macroeconomic normal, that addresses only the short to medium run. Deficits of the type Republicans are proposing cannot be sustainable in the long run for another reason.
The growing burden of debt service
Nothing described above is really any more than just the normal business cycle, which won't go away just because Republicans are in charge. To understand what deficits are or are not sustainable requires going beyond the simple assumption that all deficits are bad to a more complex understanding (invariably derided by people who see complex understandings as mere hypocrisy) that not all deficits are alike. This requires understanding the distinction between temporary deficits and permanent deficits, cyclical deficits and structural deficits, and primary deficits and fiscal deficits.
Temporary versus permanent deficits: This one is the simplest. A deficit caused by a short-term measure like a temporary tax break or a one-time expenditure is temporary and need not affect the long-run sustainability of the budget. A deficit caused by a permanent tax cut or implementation of a new program does affect the long-term balance of the budget and, if not made sustainable, can lead to serious problems down the road. For instance, for all the freak-out the Obama stimulus generated, most of it consisted of one-time expenditures which would expire on their own and not blow up the budget over the long run. Obamacare, by contrast, is a program that is intended to be permanent and must therefore be financed, either by tax increases, or by permanent spending cuts elsewhere. Likewise, Trump's proposed infrastructural program is a temporary measure that will expire on its own. Proposed tax cuts, on the other hand, are permanent and have ample opportunity to blow up the budget.
Cyclical versus structural deficits: This distinction is best illustrated by a graph:
A few things are significant here. One is that outlays and revenues tend to move in opposite directions. That is the business cycle at work. During recessions, revenues drop and expenditures on unemployment insurance and the like rise. But these deficits are not worrisome because they will be erased when the economy recovers. Another is that the projected expenditures and revenues are a lot smoother than the actual ones. That is because actual revenues and expenditures reflect these cyclical ups and downs, while projected ones do not.
Another point is what it shows about the Republican supply side argument that tax cuts ultimately raise revenues. Ronald Reagan's tax cuts took place in 1981, in a severe recession. That year shows a sharp drop in revenue, partly as a result of the tax cuts, and partly because of the recession. Although Reagan admirers like to boast that tax revenues increased, as we can see, they remained unchanged as a share of the gross domestic product (GDP). Bill Clinton's tax increases took place in 1993, a year in which the US was starting to come out of a recession, but recovery was looking very slow. Republicans screamed bloody murder, but revenues did increase, partly from the tax increases, and partly from general economic recovery. At the peak of the business cycle, the US budget actually went into surplus. George W. Bush cut taxes in 2001, also in a recession. Revenue fell, partly from the tax cuts and partly from the recession. With recovery, revenues recovered, shrinking the gap to well below average at the peak of the business cycle. The the financial crisis of 2008 broke out, and deficits skyrocketed to unprecedented heights. The full scope of the deficit led to panic, but spending fell and revenue improved over time. The graph below is illustrative:
This graph shows deficits as a share of GDP and how they have ebbed and flowed with economic ups and downs. Clearly the deficit following the financial crisis was larger than anything we have seen since WWII, even higher than our deficits in the 1930's. It has fallen considerably since then. But as we approach the peak of the business cycle, the deficit remains 2.5% of GDP, an abnormally large deficit for this stage. This amount is clearly structural; it will not be erased (at least not much of it) with further economic recovery, and it will rise with the next recession. So, yes, this is a problem.
Consider, then what the Republicans intend to do about it. They intend to make immense tax cuts, a major military buildup and (at least per Trump) a large infrastructural building. Then compare to what we have now. The Congressional Budget Office (CBO) estimates 2016 expenditures at $3.9 trillion and revenues at $3.3 trillion, for a deficit of approximately $600 billion as we near the peak of the business cycle, or a little over 15% of the budget. This is worrisome. Now, what do the Republicans want to do? Trump's tax cuts are estimated to reduce revenues by $5 trillion over ten years or (grumble, grumble about how I hate that "over ten years" formulation) about $500 billion per year. That would raise the deficit to $1.1 trillion per year. Add to that his infrastructural plan for $1 trillion over ten years (grumble, grumble), or $100 billion per year and you raise the deficit to $1.2 trillion, or about 30% of the budget. Recall just how intense the alarm was in 2009 when Obama took office and ran a deficit of $1.4 trillion -- and that was during the worst recession since the 1930's, with much of it clearly cyclical. To run such a deficit near the peak of the business cycle is simply unprecedented.
Can the Republicans make up the difference by spending cuts? We always accuse them of wanting to "balance the budget on the backs of the poor." Can they actually do it? See the neighboring pie chart. Interest on the deficit cannot be touched without setting off a financial crisis. Republicans intend a major military buildup. Trump has vowed not to touch Social Security or Medicare (federal health insurance for the elderly). Medicaid, the federal health insurance for the elderly, makes up 9% of the federal budget and "income security," i.e., unemployment insurance, food stamps, disability payments and other programs for the poor make up 8% of the budget. Total spending on the poor: 17% of the federal budget. If one cut this amount to zero and kept everything else the same, it would balance the budget and even leave a small surplus. But under the Trump plan, which leaves fully 30% of the budget to be paid by borrowing, even zeroing these programs out would still leave a deficit about the size we have now.
Of course, Congressional Republicans may not be as crazy as Trump. As I understand it, they are currently proposing to ditch the infrastructure and enact a smaller tax cut. (I have not been able to find any specific estimates). So we may be spared deficits exceeding $1 trillion near the peak of the business cycle. But even a more modest increase in the deficit is unlikely to be sustainable because of the third distinction.
Primary versus fiscal deficit: The first table reveals something more than just the cyclical nature of deficits. It shows that we have regularly been running a structural deficit around 2.8% of GDP for the last 50 years. How have we managed to avoid fiscal crisis all this time? The answer is the distinction between primary and fiscal deficit. The primary deficit (or surplus) is the total deficit, minus payments on the national debt.
Why is that significant? It is significant because running deficits adds to the national debt and the amount of interest we have to pay on it. At the same time, we are constantly reducing the amount by paying on it. So long as deficits are equal to or less than interest paid on the debt, they can be sustained indefinitely. But if deficits exceed interest on the national debt, then gradually they add to interest paid on the national debt, and slowly interest payments eat up more and more of the budget and leave less and less for anything else. This is why running immense deficits cannot continue forever. Sooner or later interest payments will eat up more and more of the budget.
This makes interest rates immensely important. The higher interest rates, the sooner this phenomenon takes hold. In the 1980's interest rates were extremely high, both because of inflation and attempts to fight it. The spiking of deficits meant an immediate spiking of interest rate payments eating up the budget. Our ability to run protracted deficits was much less than we have now. But even now, with extremely low interest rates, extended deficits will catch up with us sooner or later. And if (as I suspect) Republican profligacy leads to higher interest rates, then our capacity for profligacy will diminish.
And that is the real reason that deficits on the scale Trump appears to be proposing will ultimately lead to serious problems.
Premature tightening. The Fed might lose its nerve and tighten too soon, sending the economy into recession and we may find ourselves once again at the zero lower bound, with the Fed having great difficulty reviving the economy. Fortunately, the Republicans will be ready to offer plenty of fiscal support. Don't lose your nerve next time, guys!
Well-timed tightening. The Fed may get it just right. It may wait until inflation starts getting over 5%, then tighten. This will induce a recession,but as soon as inflation falls, the Fed can ease up and the economy will rebound. In this case, recession will take longer to materialize and recovery will be easier. If the Fed is feeling hackish, it may manage to time recovery to coincide with election season and offer maximum benefit to Republican. Still, they will deserve it for a well-executed maneuver. On the other hand, this scenario calls for a level of technocratic skill that Republicans not only generally lack, but are ideologically opposed to, so I am inclined to consider it unlikely.
A soaring dollar and an asset bubble. US interest rise while everyone else's remain flat. Foreign investors flock to the US. The dollar soars. This will no doubt be a source of nationalistic pride, but it will also flood the country with cheap imports and price out our exports -- exactly the opposite of what Trump was campaigning to do. This will probably not upset too many people so long as the US economy appears to be soaring. On the plus side, the US could help pull the world economy out of its rut. On the minus side, the world economy could drag the US down. But the really serious problem is that combining a vast influx of foreign capital with a relaxation of financial regulation (more on that later) is made to order for another bubble and bust. Then again, this scenario could be avoided if right wing populists in other countries see the US economy surging from reckless spending and monetary expansion and do the same.
Too much inflation. We all know what normally happens with countries finance deficits by printing money -- inflation. Japan has avoided that fate because it is at the zero lower bound. We are beginning to move away from it, at least, the Fed has raised short-term rates above zero without tanking the economy. Once we move away from the zero lower bound, our ability to finance deficits by printing money will start to generate inflation. To an extent (Krugman estimates until inflation reaches 4-5%) this will be a healthy development. But what after that? What if the Republicans find a Fed sufficiently hackish to keep expanding in order to expand Republican fortunes? Inflation will continue to escalate. There is another term for continuing such a policy -- macroeconomic populism. It has long been practices by left-wing populists in Latin American countries, and has invariably led to hyperinflation. Rates have hit triple, quadruple, and even quintuple digits. I am not worried about such a thing happening here. The Fed has proven that it can curb inflation by tightening. Well short of that point, people will be prepared to tolerate a short-term recession rather than allow any more inflation.
When will that time come? I have no idea if it will even get to that. But it seems a safe bet that no one will much mind 4-5% inflation. I have no idea how high above that it can go before people get upset. 6-7%? 8-9%? I am reasonable confident that if inflation ever reaches double digits, the pressure will grow to do something about it, and the Fed will. And anyhow, all this is purely speculative.
But even assuming that we get the macro right and that the economy returns to a macroeconomic normal, that addresses only the short to medium run. Deficits of the type Republicans are proposing cannot be sustainable in the long run for another reason.
The growing burden of debt service
Nothing described above is really any more than just the normal business cycle, which won't go away just because Republicans are in charge. To understand what deficits are or are not sustainable requires going beyond the simple assumption that all deficits are bad to a more complex understanding (invariably derided by people who see complex understandings as mere hypocrisy) that not all deficits are alike. This requires understanding the distinction between temporary deficits and permanent deficits, cyclical deficits and structural deficits, and primary deficits and fiscal deficits.
Temporary versus permanent deficits: This one is the simplest. A deficit caused by a short-term measure like a temporary tax break or a one-time expenditure is temporary and need not affect the long-run sustainability of the budget. A deficit caused by a permanent tax cut or implementation of a new program does affect the long-term balance of the budget and, if not made sustainable, can lead to serious problems down the road. For instance, for all the freak-out the Obama stimulus generated, most of it consisted of one-time expenditures which would expire on their own and not blow up the budget over the long run. Obamacare, by contrast, is a program that is intended to be permanent and must therefore be financed, either by tax increases, or by permanent spending cuts elsewhere. Likewise, Trump's proposed infrastructural program is a temporary measure that will expire on its own. Proposed tax cuts, on the other hand, are permanent and have ample opportunity to blow up the budget.
Cyclical versus structural deficits: This distinction is best illustrated by a graph:
A few things are significant here. One is that outlays and revenues tend to move in opposite directions. That is the business cycle at work. During recessions, revenues drop and expenditures on unemployment insurance and the like rise. But these deficits are not worrisome because they will be erased when the economy recovers. Another is that the projected expenditures and revenues are a lot smoother than the actual ones. That is because actual revenues and expenditures reflect these cyclical ups and downs, while projected ones do not.
Another point is what it shows about the Republican supply side argument that tax cuts ultimately raise revenues. Ronald Reagan's tax cuts took place in 1981, in a severe recession. That year shows a sharp drop in revenue, partly as a result of the tax cuts, and partly because of the recession. Although Reagan admirers like to boast that tax revenues increased, as we can see, they remained unchanged as a share of the gross domestic product (GDP). Bill Clinton's tax increases took place in 1993, a year in which the US was starting to come out of a recession, but recovery was looking very slow. Republicans screamed bloody murder, but revenues did increase, partly from the tax increases, and partly from general economic recovery. At the peak of the business cycle, the US budget actually went into surplus. George W. Bush cut taxes in 2001, also in a recession. Revenue fell, partly from the tax cuts and partly from the recession. With recovery, revenues recovered, shrinking the gap to well below average at the peak of the business cycle. The the financial crisis of 2008 broke out, and deficits skyrocketed to unprecedented heights. The full scope of the deficit led to panic, but spending fell and revenue improved over time. The graph below is illustrative:
Consider, then what the Republicans intend to do about it. They intend to make immense tax cuts, a major military buildup and (at least per Trump) a large infrastructural building. Then compare to what we have now. The Congressional Budget Office (CBO) estimates 2016 expenditures at $3.9 trillion and revenues at $3.3 trillion, for a deficit of approximately $600 billion as we near the peak of the business cycle, or a little over 15% of the budget. This is worrisome. Now, what do the Republicans want to do? Trump's tax cuts are estimated to reduce revenues by $5 trillion over ten years or (grumble, grumble about how I hate that "over ten years" formulation) about $500 billion per year. That would raise the deficit to $1.1 trillion per year. Add to that his infrastructural plan for $1 trillion over ten years (grumble, grumble), or $100 billion per year and you raise the deficit to $1.2 trillion, or about 30% of the budget. Recall just how intense the alarm was in 2009 when Obama took office and ran a deficit of $1.4 trillion -- and that was during the worst recession since the 1930's, with much of it clearly cyclical. To run such a deficit near the peak of the business cycle is simply unprecedented.
Of course, Congressional Republicans may not be as crazy as Trump. As I understand it, they are currently proposing to ditch the infrastructure and enact a smaller tax cut. (I have not been able to find any specific estimates). So we may be spared deficits exceeding $1 trillion near the peak of the business cycle. But even a more modest increase in the deficit is unlikely to be sustainable because of the third distinction.
Primary versus fiscal deficit: The first table reveals something more than just the cyclical nature of deficits. It shows that we have regularly been running a structural deficit around 2.8% of GDP for the last 50 years. How have we managed to avoid fiscal crisis all this time? The answer is the distinction between primary and fiscal deficit. The primary deficit (or surplus) is the total deficit, minus payments on the national debt.
Why is that significant? It is significant because running deficits adds to the national debt and the amount of interest we have to pay on it. At the same time, we are constantly reducing the amount by paying on it. So long as deficits are equal to or less than interest paid on the debt, they can be sustained indefinitely. But if deficits exceed interest on the national debt, then gradually they add to interest paid on the national debt, and slowly interest payments eat up more and more of the budget and leave less and less for anything else. This is why running immense deficits cannot continue forever. Sooner or later interest payments will eat up more and more of the budget.
This makes interest rates immensely important. The higher interest rates, the sooner this phenomenon takes hold. In the 1980's interest rates were extremely high, both because of inflation and attempts to fight it. The spiking of deficits meant an immediate spiking of interest rate payments eating up the budget. Our ability to run protracted deficits was much less than we have now. But even now, with extremely low interest rates, extended deficits will catch up with us sooner or later. And if (as I suspect) Republican profligacy leads to higher interest rates, then our capacity for profligacy will diminish.
And that is the real reason that deficits on the scale Trump appears to be proposing will ultimately lead to serious problems.
Tuesday, November 15, 2016
Generic Republican in Power: The Economy
Paul Krugman reacted to Donald Trump's election with a world-class freakout:
The current state of the economy is so-so. It could be better and it could be worse. Unemployment is falling below 5% and wages are starting to rise for the first time since the crash in 2008. Employers are starting to complain that rising wages are cutting into their profits. All this may be a sign that we are reaching the peak of the business cycle. At the same time, inflation and interest rates are extremely, even pathologically low, a sign that there is still slack in the economy. What are the chances of a recession some time during the next four years?
Here I will defer to my hero, Paul Krugman. Krugman identifies two kinds of recessions. One occurs when the central bank tightens to stop an overheating economy and accelerating inflation. Recovery is rapid once it eases off. In the 1950's and '60's, the Fed made frequent use of these, but the last such example was the 1981-1982 recession, used the break the inflationary spiral from the 1970's. That recession was unusually severe because it had particularly high inflation to fight, but as soon as the Fed eased up, the economy rebounded just in time for the 1984 election. Since then, inflation has managed to stay low without such interventions, but a new kind of recession has arisen -- the kind that follows bursting bubbles. We have seen mild ones in 1991-92 and 2000-2001 and a severe one in 2008-2009. These are less frequent than the earlier recessions, but recovery is slower.
And now, he fears, we may be heading into an age of secular stagnation, i.e., one in which total savings exceed investment opportunities and large amounts of capital will lie unemployed. The result is permanent slack in the economy, slow growth, low inflation, and pathologically low interest rates. Monetary expansion cannot cure the slack because even if it lowers short-term rates to zero, savings will still exceed investment opportunities. So, is the plus side of secular stagnation an end to the business cycle? Clearly there will be no opportunity for economies to overheat and thus no need for central banks to step on the brakes. Will there be speculative bubbles? Possibly, although those are usually the product of "irrational exuberance" during good times, which seem notably lacking right now.
And yet . . . And yet Krugman is calling for higher inflation, in the 4-5% range, so that in case of recession, central banks, by lowering real interest rates to zero, will effectively make it negative 4-5%. And yet when I look at graphs of the business cycle, we do look as though we are drawing near the peak, extremely low inflation and interest rates notwithstanding. And yet the last business cycle peaked in 2007, which will make next year ten years later. It seems a stretch to imagine the peak-to-peak business cycle would be over 13 years.
So, right now we have an improved economy, but one with some slack and no apparent prospects of ever ending the slack. What do do? Krugman and others like him recommend a fiscal stimulus, with monetary accommodation, both to end the slack in the economy and to encourage somewhat higher inflation to make it easier for the Fed to lower interest rates in future recessions. The main obstacle to such a course so far has been that all parties have been faint-hearted. Prudence has led all responsible parties to balk at the sort of deficits such a policy would entail, and the whole finance industry wants higher interest rates to increase profits.
Enter Republicans to the rescue. Every Republican knows that deficits only matter when a Democrat is in the White House. They also know that deficits that result from tax cuts don't count; only deficits from spending increases count. Also, military spending doesn't count either, only social spending. So, Republicans are doing what they always do, proposing massive tax cuts and a military buildup. Trump is now adding a new measure to the mix -- a trillion dollar infrastructure plan. I have no idea whether they will reject the infrastructure as an extravagance and stick to the tax cuts and military buildup or whether partisanship will prove stronger than principle and they will reject it. But one thing I am confident about is that Republicans will never be faint-hearted about deficits brought about by tax cuts, especially at the top. Remember, it is Republican dogma that no tax increase can ever be justified. And while they theoretically favor spending cuts to match the tax cuts, in practice they are not prepared to do anything that unpopular, so deficits will surge. Granted Krugman and company don't think tax cuts at the top deliver much of a multiplier, but I am inclined to think that the form of fiscal stimulus matters less than the central bank's willingness to accommodate it with monetary policy.
So, what are the chances there? Hard to say. It is true that central banks have also proven faint-hearted and not been willing to give a really aggressive monetary stimulus to get the economy going, but less to favor inflation over 2%. And it is also true that so long as Obama has been in power, Republicans have maintained an almost theological commitment to tight money as a universal and timeless moral imperative, some even going so far as to endorse a gold standard.
Well, make no mistake. Once Trump is inaugurated, Republicans will regard tight money as a universal and timeless imperative that must be continued in good times and bad, in all economic circumstances. To propose any deviation from this moral imperative would show a lack of principle. No amount of human suffering can ever justify deviation from this universal and timeless imperative and, indeed, the more pain the Fed inflicts with tight money the better, since it will mean a richer reward down the road. So money must always be kept tight, without exceptions -- unless a Republican is in the White House and tightening might hurt his political fortunes, in which case we must be reasonable.
But Republican politicians will not determine monetary policy; the Fed will determine monetary policy. Will the Fed accommodate? That one is harder to answer. Certainly, with a Republican in the White House, the pressure for politicians to tighten will vanish. What about the pressure from banks, theorists and (to the extent that it exists), the general public?
Ironically, I think that if the Fed manages to accommodate Republican fiscal expansion enough to get the slack out of the economy, the pressure to tighten might lessen. Fiscal stimulus is deeply counterintuitive and has proven impossible for political reasons (in Europe and the US, now and in the 1930's). Less apparent but nonetheless there are some similar pressures on central banks. Since most people think of inflation solely in terms of prices and not of wages, people tend to become extremely inflation averse when their wages are stagnant, even though stagnant wages are in themselves part of very low inflation. Likewise, the finance industry gets upset about low interest rates and puts pressure on central banks to tighten when rates get low. But there, too, there is a bit of zen at play. As Milton Friedman says, high nominal interest rates are a sign that money has been too loose; low nominal rates are a sign that it has been too tight.
How can this be so? The first half is simple. Too-easy money leads to inflation. Inflation leads to high interest rates. The second half is merely a reflection of the first. Too-tight money depresses the economy, a depressed economy leads to low interest rates because of the lack of investment opportunities. Still, automatically linking them to monetary policy makes yet another assumption. If high interest rates are the result of easy money, it means that inflation is necessarily the result of too-easy monetary policy and can always be cured by monetary tightening. This is an uncontroversial statement that basically everyone agrees with.
But the second side makes another assumption -- that a depressed economy is always the result of too-tight monetary policy and that, regardless of what shocks it receives, an economy can always be revived by monetary expansion. That latter is very controversial indeed. Can central banks always boost the economy by printing more money? And keep in mind that central banks "print" money by buying up government debt. That means that they can continue a monetary expansion only if the government obliges by running massive deficits. Well, all evidence is that the Republicans are going to oblige in that regard! Once they get the slack out of the economy, interest rates will rise and the finance industry will stop clamoring for tightening. Once nominal wages start to rise more, people will stop being as upset about rising prices. Krugman thinks we need 4-5% inflation to ensure that central banks will have maneuvering room to cut rates in case of recession. We have often had inflation at that rate during good times and no one has minded in the least.
So the question should be, will the Fed have the nerve to keep expanding when inflation rises above its official target? Or to raise its inflationary target, which was sheer madness in the past, but might be okay now that there is a Republican in the White House? I am guessing that the current leadership will not be willing to raise its inflation target. I have no sense at all whether they will allow inflation to overshoot its target once the pressure to tighten recedes.
But then again, it will take time for inflation to start rising above the 2 percent target. Current chairman Janet Yellen's term expires in February, 2018. Maybe by the time it expires, the Republicans can find a hack who cares more about Republican political fortunes that responsible monetary policy and will continue to expand until inflation reaches 4-5%. It doesn't seem so far-fetched.
Krugman loves saying that what we need is for central banks to credibly promise to be "irresponsible," but they are such staid institutions that he is not sure it is possible. That is one reason why he thinks they need some fiscal support. Well, if there is one person whose promises to be irresponsible will be absolutely credible, it is Donald Trump. But other Republicans aren't far behind. Maybe they can find an equally irresponsible person to manage the Fed and actually revive the economy.
Next: How it can go wrong.
It really does now look like President Donald J. Trump, and markets are plunging. When might we expect them to recover? . . . . If the question is when markets will recover, a first-pass answer is never.
. . . . . .
It’s true that we’ve been adding jobs at a pretty good pace and are quite close to full employment. But we’ve been doing O.K. only thanks to extremely low interest rates. There’s nothing wrong with that per se. But what if something bad happens and the economy needs a boost? The Fed and its counterparts abroad basically have very little room for further rate cuts, and therefore very little ability to respond to adverse events.
Now comes the mother of all adverse effects — and what it brings with it is a regime that will be ignorant of economic policy and hostile to any effort to make it work. Effective fiscal support for the Fed? Not a chance. In fact, you can bet that the Fed will lose its independence, and be bullied by cranks.
So we are very probably looking at a global recession, with no end in sight. I suppose we could get lucky somehow. But on economics, as on everything else, a terrible thing has just happened.This is just silly, as Krugman himself later acknowledged. Employing analysis I learned from my hero, Paul Krugman, I was able to foresee that the Brexit would not, in fact, precipitate a recession in Britain, as did Krugman himself. Don't do anything ridiculous like confuse what Republicans say when out of power (Deficits are evil! Hard money is a moral imperative!) with what they will actually do in power. Of course the Republicans will give effective fiscal support to the Fed; they are doing it already. And I have no doubt their fondness for tight money will end the minute it threatens their electoral fortunes. The Republicans taking power will give a boost to the economy. Markets are celebrating.
The current state of the economy is so-so. It could be better and it could be worse. Unemployment is falling below 5% and wages are starting to rise for the first time since the crash in 2008. Employers are starting to complain that rising wages are cutting into their profits. All this may be a sign that we are reaching the peak of the business cycle. At the same time, inflation and interest rates are extremely, even pathologically low, a sign that there is still slack in the economy. What are the chances of a recession some time during the next four years?
Here I will defer to my hero, Paul Krugman. Krugman identifies two kinds of recessions. One occurs when the central bank tightens to stop an overheating economy and accelerating inflation. Recovery is rapid once it eases off. In the 1950's and '60's, the Fed made frequent use of these, but the last such example was the 1981-1982 recession, used the break the inflationary spiral from the 1970's. That recession was unusually severe because it had particularly high inflation to fight, but as soon as the Fed eased up, the economy rebounded just in time for the 1984 election. Since then, inflation has managed to stay low without such interventions, but a new kind of recession has arisen -- the kind that follows bursting bubbles. We have seen mild ones in 1991-92 and 2000-2001 and a severe one in 2008-2009. These are less frequent than the earlier recessions, but recovery is slower.
And now, he fears, we may be heading into an age of secular stagnation, i.e., one in which total savings exceed investment opportunities and large amounts of capital will lie unemployed. The result is permanent slack in the economy, slow growth, low inflation, and pathologically low interest rates. Monetary expansion cannot cure the slack because even if it lowers short-term rates to zero, savings will still exceed investment opportunities. So, is the plus side of secular stagnation an end to the business cycle? Clearly there will be no opportunity for economies to overheat and thus no need for central banks to step on the brakes. Will there be speculative bubbles? Possibly, although those are usually the product of "irrational exuberance" during good times, which seem notably lacking right now.
And yet . . . And yet Krugman is calling for higher inflation, in the 4-5% range, so that in case of recession, central banks, by lowering real interest rates to zero, will effectively make it negative 4-5%. And yet when I look at graphs of the business cycle, we do look as though we are drawing near the peak, extremely low inflation and interest rates notwithstanding. And yet the last business cycle peaked in 2007, which will make next year ten years later. It seems a stretch to imagine the peak-to-peak business cycle would be over 13 years.
So, right now we have an improved economy, but one with some slack and no apparent prospects of ever ending the slack. What do do? Krugman and others like him recommend a fiscal stimulus, with monetary accommodation, both to end the slack in the economy and to encourage somewhat higher inflation to make it easier for the Fed to lower interest rates in future recessions. The main obstacle to such a course so far has been that all parties have been faint-hearted. Prudence has led all responsible parties to balk at the sort of deficits such a policy would entail, and the whole finance industry wants higher interest rates to increase profits.
Enter Republicans to the rescue. Every Republican knows that deficits only matter when a Democrat is in the White House. They also know that deficits that result from tax cuts don't count; only deficits from spending increases count. Also, military spending doesn't count either, only social spending. So, Republicans are doing what they always do, proposing massive tax cuts and a military buildup. Trump is now adding a new measure to the mix -- a trillion dollar infrastructure plan. I have no idea whether they will reject the infrastructure as an extravagance and stick to the tax cuts and military buildup or whether partisanship will prove stronger than principle and they will reject it. But one thing I am confident about is that Republicans will never be faint-hearted about deficits brought about by tax cuts, especially at the top. Remember, it is Republican dogma that no tax increase can ever be justified. And while they theoretically favor spending cuts to match the tax cuts, in practice they are not prepared to do anything that unpopular, so deficits will surge. Granted Krugman and company don't think tax cuts at the top deliver much of a multiplier, but I am inclined to think that the form of fiscal stimulus matters less than the central bank's willingness to accommodate it with monetary policy.
So, what are the chances there? Hard to say. It is true that central banks have also proven faint-hearted and not been willing to give a really aggressive monetary stimulus to get the economy going, but less to favor inflation over 2%. And it is also true that so long as Obama has been in power, Republicans have maintained an almost theological commitment to tight money as a universal and timeless moral imperative, some even going so far as to endorse a gold standard.
Well, make no mistake. Once Trump is inaugurated, Republicans will regard tight money as a universal and timeless imperative that must be continued in good times and bad, in all economic circumstances. To propose any deviation from this moral imperative would show a lack of principle. No amount of human suffering can ever justify deviation from this universal and timeless imperative and, indeed, the more pain the Fed inflicts with tight money the better, since it will mean a richer reward down the road. So money must always be kept tight, without exceptions -- unless a Republican is in the White House and tightening might hurt his political fortunes, in which case we must be reasonable.
But Republican politicians will not determine monetary policy; the Fed will determine monetary policy. Will the Fed accommodate? That one is harder to answer. Certainly, with a Republican in the White House, the pressure for politicians to tighten will vanish. What about the pressure from banks, theorists and (to the extent that it exists), the general public?
Ironically, I think that if the Fed manages to accommodate Republican fiscal expansion enough to get the slack out of the economy, the pressure to tighten might lessen. Fiscal stimulus is deeply counterintuitive and has proven impossible for political reasons (in Europe and the US, now and in the 1930's). Less apparent but nonetheless there are some similar pressures on central banks. Since most people think of inflation solely in terms of prices and not of wages, people tend to become extremely inflation averse when their wages are stagnant, even though stagnant wages are in themselves part of very low inflation. Likewise, the finance industry gets upset about low interest rates and puts pressure on central banks to tighten when rates get low. But there, too, there is a bit of zen at play. As Milton Friedman says, high nominal interest rates are a sign that money has been too loose; low nominal rates are a sign that it has been too tight.
How can this be so? The first half is simple. Too-easy money leads to inflation. Inflation leads to high interest rates. The second half is merely a reflection of the first. Too-tight money depresses the economy, a depressed economy leads to low interest rates because of the lack of investment opportunities. Still, automatically linking them to monetary policy makes yet another assumption. If high interest rates are the result of easy money, it means that inflation is necessarily the result of too-easy monetary policy and can always be cured by monetary tightening. This is an uncontroversial statement that basically everyone agrees with.
But the second side makes another assumption -- that a depressed economy is always the result of too-tight monetary policy and that, regardless of what shocks it receives, an economy can always be revived by monetary expansion. That latter is very controversial indeed. Can central banks always boost the economy by printing more money? And keep in mind that central banks "print" money by buying up government debt. That means that they can continue a monetary expansion only if the government obliges by running massive deficits. Well, all evidence is that the Republicans are going to oblige in that regard! Once they get the slack out of the economy, interest rates will rise and the finance industry will stop clamoring for tightening. Once nominal wages start to rise more, people will stop being as upset about rising prices. Krugman thinks we need 4-5% inflation to ensure that central banks will have maneuvering room to cut rates in case of recession. We have often had inflation at that rate during good times and no one has minded in the least.
So the question should be, will the Fed have the nerve to keep expanding when inflation rises above its official target? Or to raise its inflationary target, which was sheer madness in the past, but might be okay now that there is a Republican in the White House? I am guessing that the current leadership will not be willing to raise its inflation target. I have no sense at all whether they will allow inflation to overshoot its target once the pressure to tighten recedes.
But then again, it will take time for inflation to start rising above the 2 percent target. Current chairman Janet Yellen's term expires in February, 2018. Maybe by the time it expires, the Republicans can find a hack who cares more about Republican political fortunes that responsible monetary policy and will continue to expand until inflation reaches 4-5%. It doesn't seem so far-fetched.
Krugman loves saying that what we need is for central banks to credibly promise to be "irresponsible," but they are such staid institutions that he is not sure it is possible. That is one reason why he thinks they need some fiscal support. Well, if there is one person whose promises to be irresponsible will be absolutely credible, it is Donald Trump. But other Republicans aren't far behind. Maybe they can find an equally irresponsible person to manage the Fed and actually revive the economy.
Next: How it can go wrong.
Sunday, November 13, 2016
Republican Now Face the Responsibilities of Power
Again in the calm after the election, I can see why so many people have been eager to support Trump. The man knows nothing about policy and doesn't much care. That means he will be somebody's puppet. The question is whose. Everyone is eager to get in on the act in order to make Trump their puppet. The Alt Right people gathered round Trump partly because they liked his message and partly because they saw a useful puppet. Conventional Republicans see a promising puppet and are eager to get in on the act. If things go sour for the Republicans, even the Democrats might want in on the act. For right now, at least, Trump is looking to govern more or less like a conventional Republican. What is this likely to mean?
Well, just for point of comparison, let us consider what would have happened if Hillary Clinton had won. The partisan warfare of the Obama years would have continued and even escalated. Republicans would have honed in on investigating the e-mails and quite possibly impeaching her. If Republican had kept the Senate majority, they would have blocked all Supreme Court nominees, probably all federal judges, and possibly even executive appointees. Government shutdowns, and debt ceiling showdowns, going on longer and longer, would have been the order of the day. Quite possibly, Hillary would have had to declare the debt ceiling unconstitutional to prevent a breach, with Republican outcry of executive tyranny. In short, Republican would have continued their strategy of the Obama years -- demand to be put in charge, or they will make the country ungovernable.*
It should be obvious by now that no number or amount of defeat will "break the fever" for Republicans. Now they have experienced the only thing that will -- winning actual power. Now they will have to face the consequences of their actions. Here are a few general predictions.
Republicans will decide that deficits only matter when a Democrat is in the White House. In fact, deficits are important solely as a tool to bash Democrats. They will forget all about fiscal discipline until the next time a Democrat wins the White House. And make no mistake, during the honeymoon there will be fantasies about Republicans being so successful as to lock down the White House forever, but it won't happen. Sooner or later, Democrats will win it back, and at that point Republican will suddenly rediscover fiscal discipline, claim that they only lost because they abandoned it, and start utterly freaking out about those deficits that will ruin us all.
During the Obama years, John Boehner attempted to force over the Republican agenda by threatening a debt ceiling breach if it wasn't adopted. He failed, at least in part, because the Freedom Caucus refused to raise the debt ceiling under any circumstances whatever. My guess is, now that the Republicans are in charge, the Freedom Caucus will forget all about what an outrage raising the debt ceiling is and continue to do it as a matter of routine.
Let's face it. The Freedom Caucus was never about passing any particular agenda, or even cutting spending. It was about rage over being denied the power members saw as their due, and the desire, either to remove Obama from office, or at least to humiliate him and to force something over that he hated. The establishment Republicans, by contrast, had a specific agenda that they were interested in passing and willing to make at least some compromises (like, say, not blowing up the world financial system) to get it passed.
Well, now that the Republicans have the triple crown, the party establishment, acting on behalf of its donor class, will have the opportunity to actually pass its agenda. And once it comes into focus, it should dispel all notions that the establishment/donors are the reasonable or moderate ones. Yes, they have better manners than the rowdies, but the rowdies basically just wanted dominance for the sake of dominance, which is exactly what Trump stands for. (Or at least stood for during the election). In terms of actual agenda, the establishment/donors want to roll back the New Deal as far as is politically feasible. This is a goal that has the support of basically no one outside the Republican donor class, and certainly not the Republican base, who are major beneficiaries of the New Deal.
Republican donors/establishment despise Eisenhower as a traitor for making peace with the New Deal. They applaud Barry Goldwater for once again committing Republicans to undo it. They see Ronald Reagan as their hero for carrying Goldwater's vision into reality. And they are convinced that the only reason George W. Bush lost popularity and left office in disgrace was that he refused to attack the New Deal and actually expanded entitlement by enacting Medicare D.
This narrative ignores some rather obvious things. Goldwater's attacks on the New Deal led him to overwhelming defeat. Ronald Reagan, though he campaigned against Medicare when it was originally enacted, never made any attempt to stop it and quickly scraped any plans to cut Social Security. George W. Bush actually did make one attempt to roll back the New Deal when he proposed turning Social Security into a defined contribution plan, i.e., a gigantic 401-k. The attempt was met with such resistance that it was dropped without even going to a vote. And despite Republicans' firm conviction that Medicare D was the only thing to undermine GWB's popularity, none of them have actually gone so far as to propose to repeal it.
So, Republicans now have the triple crown, just as they did for most of the GWB Presidency. We will see what use they make of it. My next few posts will address this issue, continuing to pretend that the President will be an ordinary generic Republican instead of Donald Trump.
_____________________________________
*While the chances of Democrat winning the triple crown were essentially nil, if they had I would have had two recommendations for them to do before they inevitably lost it at the midterms. First would be more subsidies to shore up Obamacare. The other would be to abolish the debt ceiling to prevent any more threats of a breach.
Well, just for point of comparison, let us consider what would have happened if Hillary Clinton had won. The partisan warfare of the Obama years would have continued and even escalated. Republicans would have honed in on investigating the e-mails and quite possibly impeaching her. If Republican had kept the Senate majority, they would have blocked all Supreme Court nominees, probably all federal judges, and possibly even executive appointees. Government shutdowns, and debt ceiling showdowns, going on longer and longer, would have been the order of the day. Quite possibly, Hillary would have had to declare the debt ceiling unconstitutional to prevent a breach, with Republican outcry of executive tyranny. In short, Republican would have continued their strategy of the Obama years -- demand to be put in charge, or they will make the country ungovernable.*
It should be obvious by now that no number or amount of defeat will "break the fever" for Republicans. Now they have experienced the only thing that will -- winning actual power. Now they will have to face the consequences of their actions. Here are a few general predictions.
Republicans will decide that deficits only matter when a Democrat is in the White House. In fact, deficits are important solely as a tool to bash Democrats. They will forget all about fiscal discipline until the next time a Democrat wins the White House. And make no mistake, during the honeymoon there will be fantasies about Republicans being so successful as to lock down the White House forever, but it won't happen. Sooner or later, Democrats will win it back, and at that point Republican will suddenly rediscover fiscal discipline, claim that they only lost because they abandoned it, and start utterly freaking out about those deficits that will ruin us all.
During the Obama years, John Boehner attempted to force over the Republican agenda by threatening a debt ceiling breach if it wasn't adopted. He failed, at least in part, because the Freedom Caucus refused to raise the debt ceiling under any circumstances whatever. My guess is, now that the Republicans are in charge, the Freedom Caucus will forget all about what an outrage raising the debt ceiling is and continue to do it as a matter of routine.
Let's face it. The Freedom Caucus was never about passing any particular agenda, or even cutting spending. It was about rage over being denied the power members saw as their due, and the desire, either to remove Obama from office, or at least to humiliate him and to force something over that he hated. The establishment Republicans, by contrast, had a specific agenda that they were interested in passing and willing to make at least some compromises (like, say, not blowing up the world financial system) to get it passed.
Well, now that the Republicans have the triple crown, the party establishment, acting on behalf of its donor class, will have the opportunity to actually pass its agenda. And once it comes into focus, it should dispel all notions that the establishment/donors are the reasonable or moderate ones. Yes, they have better manners than the rowdies, but the rowdies basically just wanted dominance for the sake of dominance, which is exactly what Trump stands for. (Or at least stood for during the election). In terms of actual agenda, the establishment/donors want to roll back the New Deal as far as is politically feasible. This is a goal that has the support of basically no one outside the Republican donor class, and certainly not the Republican base, who are major beneficiaries of the New Deal.
Republican donors/establishment despise Eisenhower as a traitor for making peace with the New Deal. They applaud Barry Goldwater for once again committing Republicans to undo it. They see Ronald Reagan as their hero for carrying Goldwater's vision into reality. And they are convinced that the only reason George W. Bush lost popularity and left office in disgrace was that he refused to attack the New Deal and actually expanded entitlement by enacting Medicare D.
This narrative ignores some rather obvious things. Goldwater's attacks on the New Deal led him to overwhelming defeat. Ronald Reagan, though he campaigned against Medicare when it was originally enacted, never made any attempt to stop it and quickly scraped any plans to cut Social Security. George W. Bush actually did make one attempt to roll back the New Deal when he proposed turning Social Security into a defined contribution plan, i.e., a gigantic 401-k. The attempt was met with such resistance that it was dropped without even going to a vote. And despite Republicans' firm conviction that Medicare D was the only thing to undermine GWB's popularity, none of them have actually gone so far as to propose to repeal it.
So, Republicans now have the triple crown, just as they did for most of the GWB Presidency. We will see what use they make of it. My next few posts will address this issue, continuing to pretend that the President will be an ordinary generic Republican instead of Donald Trump.
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*While the chances of Democrat winning the triple crown were essentially nil, if they had I would have had two recommendations for them to do before they inevitably lost it at the midterms. First would be more subsidies to shore up Obamacare. The other would be to abolish the debt ceiling to prevent any more threats of a breach.
Saturday, November 12, 2016
Why Democrats Lost White Working Class Votes: Blame Romney
One of the big questions going around on my side is why so many members of the white working class, particularly in the Midwest, vote for Obama in 2012 and Trump in 2016. Racism can't be the answer, since they were willing to vote for a black candidate. Nor is it likely to be economic hardship. Economic hardship could certainly explain their willingness to vote for Obama in 2008, since he was the candidate of change during an economic disaster. But in 2012 he owned the economy. And the economy was in considerably worse shape in 2012 than it is today, so that can't be the answer.
The usual answer I am seeing is either that Trump was an uniquely inspiring candidate, or that Hillary was a uniquely uninspiring one. The e-mails come in too, of course. But I am inclined to think that the answer may lie, not with Trump or Clinton or Obama, but with Mitt Romney. If the Republicans were trying to come up with the worst possible candidate for appealing to the working class, Mitt Romney would be a pretty good choice, although Eric Cantor might give him a good run for his money. The problem was not that Romney was a plutocrat; Trump is that as well. It was not that Romney made his fortune in finance, a strongly unpopular industry at the time. It was not even that he lacked the common touch, which Trump manifestly has. His problem was that he shared the Democrats' basic weakness with the working class.
The big reason I keep hearing why the white working class hates Democrats is that they are a liberal elite that holds the white working class in contempt. Trump's appeal is that he perfectly returns that contempt and what the white working class feels about it. Well, about the time of the 2012 election, a whole coterie of Rand-ite Republicans in general and Romney in particular were also expressing contempt for the working class. The difference was that Democrats expressed a cultural contempt for the working class, while Republicans expressed an economic contempt. It wasn't just Romney's 47% comments. Republicans everywhere were speaking of businessmen and entrepreneurs as the only productive members of society who actually contributed anything, and people who were content to let someone else sign their paycheck as a bunch of losers who never worked a day in their lives and never contributed anything to society. They were speaking of working an 18 hour day as a sign of virtue and the desire for any leisure as mere laziness. That is not the way to appeal to the working class! The bartender who filmed the 47% speech was apparently outraged, less by the speech, than with Romney's general approval of the low wages, long hours and poor working conditions in China. Again, a very poor pitch to the working class!
In short, Romney was very much the candidate of the Republican donor class. And the agenda of the Republican donor class is very much at odds with the agenda of its voting base. I intend to address that more in my upcoming posts.
The usual answer I am seeing is either that Trump was an uniquely inspiring candidate, or that Hillary was a uniquely uninspiring one. The e-mails come in too, of course. But I am inclined to think that the answer may lie, not with Trump or Clinton or Obama, but with Mitt Romney. If the Republicans were trying to come up with the worst possible candidate for appealing to the working class, Mitt Romney would be a pretty good choice, although Eric Cantor might give him a good run for his money. The problem was not that Romney was a plutocrat; Trump is that as well. It was not that Romney made his fortune in finance, a strongly unpopular industry at the time. It was not even that he lacked the common touch, which Trump manifestly has. His problem was that he shared the Democrats' basic weakness with the working class.
The big reason I keep hearing why the white working class hates Democrats is that they are a liberal elite that holds the white working class in contempt. Trump's appeal is that he perfectly returns that contempt and what the white working class feels about it. Well, about the time of the 2012 election, a whole coterie of Rand-ite Republicans in general and Romney in particular were also expressing contempt for the working class. The difference was that Democrats expressed a cultural contempt for the working class, while Republicans expressed an economic contempt. It wasn't just Romney's 47% comments. Republicans everywhere were speaking of businessmen and entrepreneurs as the only productive members of society who actually contributed anything, and people who were content to let someone else sign their paycheck as a bunch of losers who never worked a day in their lives and never contributed anything to society. They were speaking of working an 18 hour day as a sign of virtue and the desire for any leisure as mere laziness. That is not the way to appeal to the working class! The bartender who filmed the 47% speech was apparently outraged, less by the speech, than with Romney's general approval of the low wages, long hours and poor working conditions in China. Again, a very poor pitch to the working class!
In short, Romney was very much the candidate of the Republican donor class. And the agenda of the Republican donor class is very much at odds with the agenda of its voting base. I intend to address that more in my upcoming posts.
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