Balanced Budget Amendment Would be a Disaster

If you want to see how horribly austerity works for the general population, look what’s happened to Europe. Deficits create demand somewhere in the economy, and removing the ability to run them would be horrifying, especially in recessions.

The House is set to take up a balanced budget amendment this week, which would limit federal spending in each fiscal year to federal receipts in that year. Putting aside for a moment the chutzpah of House Republicans trying to pass a balanced budget amendment (BBA) just a few months removed from their passage of a $1.5 trillion tax cut that went largely to the richest households and big corporations, the simple fact is that the economic consequences of a balanced budget amendment range from extremely bad to catastrophic. The reason for this is that a BBA would amplify any negative economic shock to the economy and would thereby turn run-of-the-mill recessions into disasters.

When the economy enters a recession, government deficits increase as tax revenues decline and government spending on programs such as unemployment insurance increase. These “automatic stabilizers” are incredibly important as they cushion the blow to the economy from a recession. For example, researchers at Goldman Sachs found that the shock to private sector spending from the bursting of the housing bubble was larger than the shock that led to the Great Depression of the 1930s. Given this larger initial shock, why didn’t we have another Great Depression, with unemployment rates approaching 20 percent and beyond, in 2009–10? The simple reason is that the mechanical increase in the deficit from tax reductions and increased transfer payments absorbed a lot (not enough, but a lot) of this shock, and automatic stabilizers were either non-existent or a lot smaller in the 1930s. Having these programs in place to absorb recessionary shocks is one of the great economic advances of the past 80 years—and getting rid of them by imposing a BBA makes as much sense as outlawing computers or antibiotics.

Patents and Copyrights as Plutocratic Tariffs That are Relics of the Medieval Guild System

A useful analysis rarely seen in the debate.

Many pundits have attacked Trump’s focus on steel and manufacturing because they argue, we should be more concerned about protecting US corporations’ patents and copyrights overseas. This doesn’t make sense.

At the most basic level, stronger and longer patent and copyright protection means that people in other countries have to pay more money. These government-granted monopolies often allow companies to raise the price of the protected items by a factor of 10 or even a 100. In this way, they are equivalent to tariffs of several thousand percent.

Just to be clear, this is not a point that can be honestly disputed by economists. If a government barrier raises the price of a good, it doesn’t matter whether we call that barrier a “tariff” or a “patent,” the impact on the market is the same.

This means if Pfizer’s patent protection on a drug allows it to raise the price it charges for a drug in China or some other developing country by a factor of 10 over the free market price, it is equivalent to imposing a tariff of 1000 percent on the drug. The difference is that instead of the tariff revenue going to the government, it goes back to Pfizer as higher profits.

It’s obvious that higher profits for Pfizer are good for its shareholders and top executives, but why should the rest of us be happy about people in developing countries paying more money to Pfizer for its drugs? Many of us care more about poor people being able to get drugs than Pfizer’s profits.

The story gets even worse. The more money that Pfizer and other US companies collect overseas for their patents and copyrights, the less these people have to spend on other goods and services. In effect, because Pfizer can charge more for its drugs, people in China and other countries have less money to spend on US-made cars and planes. How is this good for most of the people in the United States?

The pushers of stronger and longer patent and copyright protection will undoubtedly claim that higher profits will provide more incentive for research and creative work. This is true, but what are the numbers? If Pfizer gets another $1 billion in profit will they invest one percent of it in research?

That would be an increase, but that means the world would be spending $1 billion in higher drug prices to get an additional $10 million in research. That’s not a very good deal. And, even this research could be largely wasted on developing copycat drugs that are intended to gain a portion of a competitor’s patent earnings by duplicating a successful drug. Again, that could be good for Pfizer, but it is not especially helpful for the rest of us who want to see research focused on developing treatments for conditions where there is not already an effective drug.

To be clear, we do need a mechanism for financing research and creative work, but there is little reason to believe that patent and copyright monopolies are the most effective tool. These are relics of the Medieval guild system. We can do better in the 21st century.

Deregulating the Banks and Risking Another Economic Disaster

The economic crash that happened around 2008 was truly horrible, as many who lived through it are aware. The negative effects of the crash were felt overall worldwide and included trillions of dollars lost in worker pensions and savings, chronically high unemployment, trillions of dollars worth of lost output, and lots of other residual suffering. There were also woefully inadequate positive changes — there have been insufficient measures to help the vast majority of the population and the criminogenic structure of the too big to fail banking industry is mostly the same as it was in 2007.

All of these considerations about the economic crisis warrant thinking about why it happened in the first place, so that the same foolish mistakes that caused immense human suffering don’t have to be repeated again. Beyond possibly referring to the inevitable instability of the state capitalist economic system, it’s rational enough to look back to 1999, when a large part of the consequential deregulation happened.

In 1999, the U.S. Congress passed the Graham-Leach Act that (among other things) repealed important sections of the 1930s Glass-Steagall Act. Glass-Steagall’s important provision was that it by law set a firewall between depository banking and investment banking. There were unpunished violations of this law by the banks over the decades, but it’s a rational law and it did quite well at its specific purpose, which is to try to prevent the reckless gambling with consumer savings that’s actually still allowed today.

The big story of why the crash happened though is the housing bubble that the big banks and certain other financial corporations (with immoral behavior and using predatory lending practices to consumers) largely created. This housing bubble was evident enough to reasonable economists that don’t serve plutocratic interests, but there are few of those, so only a select few economists spotted the bubble early on.

“We had a 8 to 10 trillion dollar housing bubble over the decade from ’96 to 2006,” said economist Dean Baker, who in 2002 predicted the bubble and the recession it caused. “House prices rose by more than 80 percent by one measure, 100 percent in excess of inflation. Over the prior hundred years — 1895 to 1995 — house prices had just kept even with inflation. This should have been real simple.”

The housing bubble did drive the economy forward through what’s known as the wealth effect, where people (primarily lower- and middle-income people) spend more money — typically 5 to 7 cents on a dollar — if they have a higher net worth. The higher spending (estimated at between 400 to 500 billion dollars a year, about a twentieth of $8 trillion, and about $3000 per 2018 U.S. household) drove more demand and contributed to some economic gains. These gains came with a heavy cost though, and that cost was the bubble popping and causing the worst economic collapse since the Great Depression.

Why the Great Recession was as bad as it was in the U.S. is actually fairly simple. About $8 trillion worth of housing bubble wealth disappeared with the bubble’s pop, and with that went a lot of consumer purchasing power or what’s known as demand. The main problem for the Great Recession being as horrendous as it was is due to there not having been enough demand in the economy, or to use different terms, the vast majority of people were screwed over too hard and weren’t given adequate resources to recover with. Instead, the U.S. government (and some other governments with different measures) acted with urgency to bail out the financial corporations that primarily caused the crash problem.

The story of the big bank bailouts is particularly noteworthy because it was unnecessary. Actually, a strong majority of the U.S. population was opposed to the bailouts, and if the U.S. had a real, functional democracy, that strong majority opposition would have translated into policy. The bank bailouts were unnecessary though because it was known how to keep the financial system operating when the banks failed — this was seen in the S&L crisis of the late 1980s, for example. There were also simply other ways to help most people — the central bank of the U.S. that loaned trillions of dollars at extremely low interest rates to failed banks could have been used for numerous superior purposes, such as providing an investment stimulus that would actually fully compensate for the shortfall of demand. The stimulus enacted by the Obama administration simply wasn’t large enough, and many people suffered for that.

Now today on March 15, 2018, it’s being reported that the U.S. Congress is about to deregulate the banks again. The process of another significant economic recession and expensive public bailout are a real possibility. This is noted as banks such as Morgan Stanley and Citigroup wouldn’t even exist today if they hadn’t been bailed out, and it’s disturbing that the deregulation will allow them increased opportunity to boost profits through extracting money from consumers via fraud.

It’s also noted as the implicit regulation — that there will be a bailout if a big bank fails — also remains in place, and this implicit subsidy (which prompts riskier financial activities) has been estimated by the IMF to cost about $70 billion ($550 per U.S. household) annually. This is yet another drain on the economy through the corrupted financial system, which could be eliminated or reduced through enacting a financial transactions tax, breaking up the big banks, and/or bringing democratizing measures to economic institutions.

In sum, the history of this deregulation and misregulation of the financial sector presents a clear picture of the problems it causes. More people must be aware of this and organize effectively to prevent these same unnecessary mistakes from being made yet again.

A Lower Unemployment Rate, Inflationary Pressures, and Central Banks in Policy

How low can the unemployment rate go without causing excessive inflation? It’d be a nice experiment to find out. Usually not mentioned is that big banks – which of course wield pretty significant power – dislike inflation because they’ll typically have a supply of long-term loans on their books. Those loans stand to depreciate in value with higher inflation, and that’s largely the reason why there’s such pressure to keep inflation lower than necessary through central bank interest rate increases.

The loans of banks and other financial corporations typically are set at a fixed rate, so again, the repayments of those loans will be worth less to them if inflation rises. For one example, if a bank offered a 5 percent home loan while expecting that inflation would be 1 percent, the bank would assume that it would receive a real interest rate of 4 percent. If the inflation rate actually becomes 2 percent, the bank will take a considerable profit loss (receiving a 3 percent real interest rate) compared to what it expected, as there’s less loan money for it in real terms because of the higher inflation.

The interest rate increases do of course have the side effect of slowing the economy, and that contributes to a higher unemployment rate that leaves lower-income employees less bargaining power for wage increases. Along with how interest rate raises (beyond a certain point, of course) lead to less job opportunities, the point about worker bargaining potential is important, as a central bank wields a lot of power in society. It’s preferable to see that power used for the common good instead of for the financial conglomerates that have caused too many problems already.

Just four years ago the Congressional Budget Office put the floor of the unemployment rate at 5.5 percent. This estimate implied that if the unemployment rate fell below this level that the inflation rate would begin to spiral upwards.

The unemployment rate has now been well below this level for more than two-and-a-half years, and there is still no evidence of an inflationary spiral. In fact, the inflation rate remains well below the Federal Reserve’s 2 percent target.

If the Fed and Congress had tried to craft monetary and fiscal policy around this 5.5 percent figure, as many economists advocated, millions of workers would have been needlessly denied the opportunity to get jobs. Tens of millions would be looking at lower wages, as the tighter labor market has finally allowing workers at the middle- and bottom-end of the labor market to finally share in the gains of economic growth.

Report Finds Significant Benefits to Canceling All Student Loan Debt

Canceling student debt is a proposal worth supporting, and it isn’t even radical when it’s considered that the student debt shouldn’t have been allowed to accrue anywhere near the depraved level of $1.4 trillion. It’s also not radical when it’s considered that there is enormous U.S. welfare granted to the rich and to major corporations, much more welfare than the amount that goes to poor and middle-income people.

report from a group of economists at the Levy Economics Institute of Bard College finds that there would be huge benefits if the federal government were to forgive all existing student debt. This would ripple out from young people struggling to pay off massive college loans to the economy as a whole, according to the report.

“The idea of canceling student debt is not just some crazy idea out of left field, but is actually something that could be done, and done in a way that has a moderately positive economic impact,” Marshall Steinbaum, a fellow and research director at the Roosevelt Institute and a coauthor of the report said in an interview.

“The way this and similar polices are often discussed is in a mode of ‘well can we really afford this?’ and the answer is definitely yes,” he added.

The report finds that canceling all student debt would likely lead to an increase in U.S. GDP between $861 billion and $1,083 billion over the course of 10 years. It would also lead to an increase of 1.18 to 1.55 million additional new jobs over the same period — that’s about 50% to 70% more jobs per year compared to an average of recent years.

This new analysis comes at a time when more than 44 million American have a collective $1.3 trillion in student debt — higher than both auto U.S. debt and credit card debt.

[…]

The report also finds that total loan forgiveness would cost the U.S. government approximately $1.4 trillion over the course of 10 years — a number that is almost exactly the same as what the CBO recently projected the Republican’s new tax bill would cost.

But researchers said that the positive impacts of canceling student debt would likely be more broadly felt than those of the tax bill.

“[The GOP tax bill] is going to add 1.5 trillion to deficits over the next 10 years,” Stephanie Kelton, Stony Brook University professor of public policy and economics, said in an interview. Kelton is one of the authors of the report, and recently worked as the chief economists for the Democratic minority on the Senate budget committee.

“What else could we do? Canceling student loan debt was just about perfect because it comes in at about 1.4 trillion and it’s almost six of one, half a dozen of the other in terms of the price tag,” she said.

Kelton emphasized that U.S. government shouldn’t be thinking of how it can spend money to help Americans as a zero sum game. But at the same time, if lawmakers can spend money to provide massive tax cuts for the wealthy and corporations, it can also afford to spend nearly the same amount to cancel student debt and grow the economy simultaneously.

Tax Cuts and Growth Revisited

If the U.S. economy does now have a year of GDP growth considerably higher than what it was in the past decade, it will probably lead into some political lies of the future related to tax cuts and growth. If government officials actually care about better economic growth, they’ll implement policies that invest in technological advancements and employment programs that increase capacity utilization. This growth should then go to the general public instead of the minor faction of the population that’s already wealthy.

The Democrats were virtually unanimous in opposition to the tax cuts that Republicans pushed through Congress last year. They had good cause. The overwhelming majority of the tax cuts go to the richest 1 percent of the population, the same group that has gotten the bulk of the gains from economic growth over the last four decades. For those who don’t think making the rich richer is an important priority of government, the tax cuts were a really bad idea.

[…]

While there is little reason to believe that the tax cuts would lead to the sort of boost in growth claimed by proponents, it is actually very plausible that GDP growth could average 3 percent over the next decade.

There are two factors that determine GDP growth: the rate of growth of the labor force and the rate of growth of productivity. The rate of labor force growth is almost certain to be slower going forward simply because the massive baby boom cohort will be retiring over the next decade.

[…]

This matters hugely because there is some reason to believe that productivity is picking up for reasons having nothing to do with the tax cut. Productivity growth averaged 2.1 percent in the second and third quarter of last year. It then fell slightly in the fourth quarter due to quirks in the data, specifically a surge in the number of people reported as self-employed. But with early reports indicating first quarter GDP growth will be well over 3 percent, we are likely to see another quarter of strong productivity growth.

While this uptick cannot be plausibly explained by the tax cut, there is an alternative explanation: It may simply be the result of a tighter labor market. The tighter labor market has led to increased wage growth at the bottom end of the pay ladder.

[…]

This all matters from a political standpoint because it would be unfortunate if the Republicans were to get credit for a pickup in growth which has nothing to do with them. Some of us did try to warn of this possibility last year, but the leading Democratic economists were not interested in our assessment.

Just to repeat what we said then, it is very possible that we will see something like the 3 percent GDP growth promised by the Republicans, but not because we gave more money to rich people. Because so many denied this possibility, Democratic economists may end up helping to convince people that giving money to the rich is the key to a strong economy.

A Lower Dollar Would Actually Reduce the Trade Deficit

It was unusual to see this issue come up as it did in the news recently.

A couple of days ago, Treasury Secretary Steven Mnuchin touched off a firestorm by saying something that is obviously true. He said that a lower-valued dollar would reduce the trade deficit.

As I pointed out yesterday, this is based on the radical concept of downward sloping demand curves. The idea is that when the dollar falls in value relative to other currencies, it makes goods and services produced in the United States cheaper for people living in other countries. This means that they will buy more of our exports.

On the other side, a lower-valued dollar means that we will pay more for imports. This means that we would buy fewer goods and services from other countries and instead buy domestically produced goods and services.

With fewer imports and more exports, we have a smaller trade deficit. It’s all pretty straightforward.

[…]

We saw a massive increase in the trade deficit in the last decade which eventually peaked at almost 6.0 percent of GDP in 2005 and 2006. This led to the loss of millions of manufacturing jobs, decimating communities in places like Pennsylvania and Ohio.

[…]

All of this is to say that a “strong dollar” is not just a stupid talking point. It is a really big deal with enormous economic consequences for the US and world economy. And those consequences have been very bad for large segments of the US population. Those responsible still have not owned up to this fact. (I’ll also add the little tidbit that the fact our manufacturing workers have to compete with labor in the developing world and our doctors don’t is by design, not a fact of nature. This is yet another reason why those harmed by the high dollar have reason to complain.)