The Regressive Austerity Arguments of the Washington Post

Austerity is where governments refuse to pursue policies that boost consumer demand. Austerity really has hurt a lot of people and there’s even evidence that the poverty it caused has ruined millions of lives.

Last week the Washington Post ran a column by Maya MacGuineas, the president of the Committee for a Responsible Federal Budget, one of the many pro-austerity organizations that received generous funding from the late Peter Peterson. The immediate target of the column was the standoff over the debt ceiling, but the usual complaints about debt and deficits were right up front in the first two paragraphs.

“At the same time, the federal debt as a share of the economy is the highest it has ever been other than just after World War II. ….”

“So our plan is to borrow a jaw-dropping roughly $900 billion in each of those years — much of it from foreign countries — without a strategy or even an acknowledgment of the choices being made because no one wants to be held accountable.”

This passes for wisdom at the Washington Post, but it is actually dangerously wrong-headed thinking that rich people (like the owner of the Washington Post) use their power to endlessly barrage the public with.

The basic story of the twelve years since the collapse of the housing bubble is that the U.S. economy has suffered from a lack of demand. We need actors in the economy to spend more money. The lack of spending over this period has cost us trillions of dollars in lost output.

This should not just be an abstraction. Millions of people who wanted jobs in the decade from 2008 to 2018 did not have them because the Washington Post and its clique of “responsible” budget types joined in calls for austerity. This meant millions of families took a whack to their income, throwing some into poverty, leading many to lose houses, and some to become homeless.

At this point, the evidence from the harm from austerity in the United States (it’s worse in Europe) is overwhelming, but just like the Pravda in the days of the Soviet Union, we never see the Washington Post, or most other major news outlets, acknowledge the horrible cost of unnecessary austerity. We just get more of the same, as though the paper is hoping its readers will simply ignore the damage done by austerity.

And it is not just an occasion column from a Peter Peterson funded group, the Post’s regular economic columnist, Robert Samuelson, routinely complains about budget deficits, as do the Post editorial writers. We get the same story in the news section as well, for example, this piece last week telling us about the need to “fix” the budget. The Post is effectively implying that a lower budget deficit, which results in lower output and higher unemployment is “fixed.”

If the Post cared about the logic of its argument, instead of just repeating platitudes about the evils of budget deficits, it should quickly recognize that its push for austerity makes no economic sense. The argument of the evils of a budget deficit is that it is supposed to lead to high interest rates and crowd out investment.

That leaves the economy poorer in the future, since less investment leads to less productivity growth, so the economy will be able to produce fewer goods and services in future years. (The implicit assumption is that the economy is near its full employment level of output so that efforts by the Fed to keep interest rates down by printing money would lead to inflation.)

The nice part of this story is that there is a clear prediction which we can examine; high budget deficits lead to high interest rates. Or, if the Fed is asleep on the job, high budget deficits will lead to high inflation.

The interest rate on 10-year Treasury bonds at the end of last week was just over 2.0 percent. That is incredibly low by historic standards and far lower than the rates of over 5.0 percent that we saw when the government was running a surplus in the late 1990s. The inflation rate is hovering near 2.0 percent and has actually been trending slightly downward in recent months. So where is the bad story of the budget deficit?

In the classic deficit crowding out investment story, if we cut the budget deficit, investment rises to replace any lost demand associated with lower government spending or higher taxes. We can also see some increased consumption, mostly due to mortgage refinancing, and some increase in net exports due to a lower valued dollar.

But what area of spending does the Washington Post and its gang of deficit hawks think will fill the gap if it could find politicians willing to carry through the austerity it continually demands? It shouldn’t be too much to ask a newspaper that endlessly harps on the need for lower deficits to have a remotely coherent story on how lower deficits could help the economy.

There is also the burden on our children story that the Peter Peterson gang and the Post likes to harangue readers with. Our children will inherit this horrible $20 trillion debt that they will have to pay off over their lifetimes.

This story makes even less sense than the crowding out story. The burden of the debt is measured by the interest paid to bondholders, which is actually at a historically low level relative to GDP. It’s around 1.5 percent, after we subtract the interest rebated by the Fed to the Treasury. It had been over 3.0 percent of GDP in the early and mid-1990s.

And, even this is not a generational burden. It is a payment within generations from taxpayers as a whole to the people who own bonds, who are disproportionately wealthy. Much of this money is recaptured with progressive income taxes. More could be captured with more progressive taxes.

But this is actually the less important issue with this sort of accounting. Direct government spending is only one way the government pays for things. It also provides patent and copyright monopolies to provide incentives for innovation and creative work. These are alternatives to direct government payments.

To be specific, if the government wants Pfizer to do research developing new drugs, it can pay the company $5-$10 billion a year to do research developing new drugs. Alternatively, it can tell Pfizer that it will give it a patent monopoly on the drugs its develops and arrest anyone who tries to compete with it.

Generally, the government takes the latter route with innovation. This can lead to a situation where Pfizer is charging prices that are tens of billions of dollars above the free market price. This monopoly price is equivalent to a privately imposed tax that the government has authorized the company to collect.

Anyone seriously interested in calculating the future burdens created by the government would have to include the rents from patent and copyright monopolies, which run into the hundreds of billions of dollars annually, and possibly more than $1 trillion. (They are close to $400 billion with prescription drugs alone.) The fact that the deficit hawks never mention the cost of patent and copyright monopolies, shows their lack of seriousness. They are pushing propaganda, not serious analysis.

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Research: Junk TV Can Make People Less Intelligent

Perhaps it’s similar to junk food, where it can worsen people’s physical condition.

A raft of new research shows that watching junky cable and other lowbrow TV is actually making people dumber — literally lowering their IQs.

In research published in the American Economic Review this month, Italian researchers showed that people with greater access to former Italian prime minister Silvio Berlusconi’s trashy entertainment TV network, Mediaset, in the 1980s were much more likely to vote for Berlusconi later in later elections. Furthermore, people with greater exposure to Mediaset as children were “less cognitively sophisticated and civic-minded as adults, and ultimately more vulnerable to Berlusconi’s populist rhetoric.”

From the American Economic Association’s writeup of the research:

In 1980, Berlusconi was an up-and-coming media entrepreneur hoping to fill a void in the television market, which was dominated by a state-owned network driven by an educational mission. Catering to a growing middle class eager to spend on entertainment, Berlusconi spent the decade rolling out Mediaset to new markets throughout the country.

At the time, Mediaset’s programming did not suggest that he was using it as a propaganda tool for political gain. Nearly all the shows were shallow, critically poorly received, and purely for fun with no educational value. Mediaset did not have a news show component until 1990. Yet, the authors found very real effects of their influence on viewers’ political sympathies.

“The language codes that were popularized by TV also made people much more susceptible to the populist party because they used very simple language,” Ruben Durante, one of the paper’s coauthors, said. “They used accessible language. And that can potentially be very powerful.”

Andrea Tesei, another coauthor, spoke to The Washington Post’s Nikita Lalwani about some of the findings.

Lalwani: You show that exposure to entertainment TV most affected the voting behavior of the very young and the very old. Were they affected in the same way?

Tesei: For the elderly, the effect was happening through habit formation. They were hooked by the kind of television that Berlusconi showed — the salacious shows and sports. They were then much more likely to watch news shows on Mediaset when those shows were introduced universally in the ’90s. And we know that news on Mediaset was slanted toward Berlusconi.

Unlike the elderly, kids were not more likely to watch news on Mediaset later on — there was no habit formation. What was happening was that kids who were introduced to Mediaset in the 1980s were much more likely to grow up socially and civically disengaged, and even more, they appear to be more cognitively shallow compared to their peers, who grew up without this entertainment diet. We were able to show that kids who grew up in Mediaset-exposed areas performed significantly worse on standardized exams taken in adulthood.

The results also applied to another Italian populist politician, Beppe Grillo and his Five Star Movement, that was not as ideologically right-wing as Berlusconi. “The fact that our results apply not just to Berlusconi but also to the Five Star Movement suggests that there is perhaps a more general message,” Tesei said. “Less civically minded voters may be more vulnerable to populistic rhetoric.”

Trump’s Failure on Trade, The Issue His Working-Class Voters Largely Elected Him With

One way to increase the American economy’s demand — or the power to buy things in the economy, which is something that most workers (their wages largely stagnant) could have used much more of in the last 40 years — is through lowering the trade deficit. A trade deficit is currently reducing demand because that gap in American spending is creating jobs and demand in a foreign country such as China instead of the U.S.

Lowering the trade deficit to 1 percent of GDP from 3 percent of GDP would grant about the same increase to demand as a $400 billion stimulus package would.

Trump told his working-class voters that he’d improve trade inequities and therefore help them by reducing the trade deficit, which of course like many of his declarations turns out to have been a sham.

The latest data from the Commerce Department shows that the trade deficit rose again in 2018. The full–year trade deficit was $621.0 billion (3.0 percent of GDP), up from $552.3 billion in 2017, and from $502.0 billion in 2016, the last year of the Obama presidency. If we pull out oil and other petroleum products, the trade deficit looks even worse, increasing by more than $77 billion from 2017 to 2018.

The picture doesn’t look any better if we look at the specific countries that Trump has vilified. The trade deficit in goods with Mexico has increased by $17.6 billion or 27.5 percent since Obama left the White House in 2016. The deficit with Canada, Trump’s “enemy“ to the north, has increased by $8.8 billion, an increase of 80.0 percent. The trade deficit in goods with China has risen by $72.2 billion since 2016, an increase of 20.8 percent.

[…]

The new China agreement does almost nothing about currency values, the most important determinant of the trade balance. After running around the country for two years complaining about China’s currency “manipulation,” there are no provisions in his new pact that would force China to raise the value of its currency against the dollar.

The sharp rise in the trade deficit in the last decade had a devastating impact on manufacturing workers and whole communities in large parts of the Northeast and the Midwest. We can’t hope to reverse this damage, as those jobs will not come back.

However, we could design a trade policy that would move us toward more balanced trade and create millions of relatively good-paying manufacturing jobs. Unfortunately, Trump’s policy seems to be going in the opposite direction.

Noam Chomsky Interview on Media and Climate Change

A good interview:

 I don’t know if you ever read the introduction to Animal Farm — probably not, because it was suppressed — but it came out after it was discovered in his papers about 30 years later, and it’s kind of an interesting introduction. The book is addressed to the people of England and he says this book is, of course, a satire about the totalitarian enemy, but he says we shouldn’t feel too self-righteous about it because — I’m quoting now — in free England, ideas can be be suppressed without the use of force.

Orwell gives some examples, and about two sentences of explanation. One is that the press is owned by wealthy men who have every interest in not wanting certain ideas to be expressed, but the other is just essentially a good education. You go on to the best schools, graduate from Oxford and Cambridge, and you just have instilled into you the understanding that there are certain things it wouldn’t do to say — and you don’t even think about it any more. It just becomes what Gramsci called “hegemonic common sense,” you just don’t talk about it. And that’s a big factor, how these things simply become internalized. People who bring them up sound like crazies.

What would be the alternative for journalism? How should it operate differently in addressing climate change?

Every single journal should have a shrieking headline every day saying we are heading to total catastrophe. In a couple of generations, organized human society may not survive. That has to be drilled into people’s heads constantly. After all, there’s been nothing like this in all of human history. The current generation has to make a decision as to whether organized human society will survive another couple of generations, and it has to be done quickly, there’s not a lot of time. So, there’s no time for dillydallying and beating around the bush.

But isn’t there a risk of disempowering people by just giving them bad news?

There is. Bad news should be combined with discussion of the things that can be and are being done. For example, a very good economist, Dean Baker, had a column a couple of weeks ago in which he discussed what China is doing. They are still a big huge polluter, but they are carrying out massive programs of switching to renewable energies way beyond anything else in the world. States are doing it.

[…]

Do you think that in the U.S. or other notionally democratic societies, is it possible to reform the media system in some ways that would better facilitate this kind of survival journalism?

One way would be for them to become democratic societies. They’re very far from it. Take elections — there’s very convincing work in mainstream political science which shows that elections in the United States are basically bought. You can predict the outcome of an election for Congress or Executive with remarkable precision just by looking at the single variable of campaign spending. That’s why when somebody’s elected to the House of Representatives, the first day in office, she or he has to start gaining donor support for the next election. Meanwhile, legislation is being written by the staff with the lobbyists from the corporations, who are actually often just writing the legislation. It’s a kind of democracy, but a very limited one.

[…]

The good side is that (social media is) the way organizing goes on. That’s the way you reach out to people, get together, and it’s a very effective tool. Practically all organizing works this way. I mean even teaching, teachers often communicate with the students through social media. That’s all anybody is doing. If you walk around campus, everybody’s (on a device). One university, I think Duke University, started putting on the pavements things that say, Look up!, because they’re all walking around looking down.

Definitely what the effects are is hard to say. You see teenage kids sitting in a McDonalds, let’s say, sitting around a table and there are two conversations going on — one in the group, and one that each person is having with whoever’s talking to them on their phone.

[…]

What conditions need to be met to enable an effective response to climate crisis?

I think there just has to be an energetic mass popular movement, which is going to compel the media to address the crises that we’re facing by constant pressure, or else simply create alternatives which will dominate the information market. And we don’t have a lot of time to waste. So, things like subsidizing independent media which is not a utopian idea, it was done in the United States in its early days; or the kinds of grassroots media movements that, say, Bob McChesney and others are pressing to develop.

And it’s an urgent requirement. I start my classes these last couple of years by simply pointing out to the students that they have to make a choice that no one in human history has ever made. They have to decide whether organized human society is going to survive. Even when the Nazis were on the rampage, you didn’t have to face that question. Now you do.

Analysis: Sanders Raise the Wage Act Would Benefit 40 Million People

The federal minimum wage hasn’t been raised since 2009, and wages for most American workers have been largely stagnant for decades. There’s been a significant upwards redistribution of income from most workers to the wealthiest people in society, which was caused by deliberate policy.

If the minimum wage had kept pace with productivity growth (gains in worker output and technological advancement) since the early 1970s, it actually would be at about $20 an hour today. The Sanders legislation on raising the minimum wage (which would not necessarily increase unemployment, as seen by some of the highest minimum wage states having some of the lowest unemployment) would thus provide a substantial standard of living increase for many.

By increasing the federal minimum wage over the next five years, the Raise the Wage Act of 2019 would boost the incomes and improve the lives of an estimated 40 million Americans, according to an analysis out Tuesday from the Economic Policy Institute (EPI).

Introduced last month by Sen. Bernie Sanders (I-Vt.) and Rep. Bobby Scott (D-Va.), the bill would raise the federal hourly minimum wage from $7.25—which Sanders calls “a starvation wage”—to a living wage of $15 by 2024. It would also require employees to pay the new minimum to tipped workers, who currently can make as little as $2.31 an hour.

[…]

In addition to helping millions of Americans escape poverty, the bill would also benefit the economy more broadly. “Because lower-paid workers spend much of their extra earnings,” the report outlines, “this injection of wages would help stimulate the economy and spur greater business activity and job growth.”

Instead of Only Taxing the Rich More, Change Pre-Tax Income Distribution So They Receive Less

Instead of just trying to tax the rich more, it would be better to prevent the distribution of income from being so unjust to begin with. Markets have been rigged in numerous ways to redistribute income upward to the wealthiest members of society.

Given the enormous increase in inequality over the last four decades, and the reduction in the progressivity of the tax code, it is reasonable to put forward plans to make the system more progressive. But, the bigger source of the rise in inequality has been a growth in the inequality of before-tax income, not the reduction in high–end tax rates. This suggests that it may be best to look at the factors that have led to the rise in inequality in market incomes, rather than just using progressive taxes to take back some of the gains of the very rich.

There have been many changes in rules and institutional structures that have allowed the rich to get so much richer. (This is the topic of the free book Rigged.) Just to take the most obvious — government-granted patent and copyright monopolies have been made longer and stronger over the last four decades. Many items that were not even patentable 40 years ago, such as life forms and business methods, now bring in tens or hundreds of billions of dollars to their owners.

If the importance of these monopolies for inequality is not clear, ask yourself how rich Bill Gates would be if there were no patents or copyrights on Microsoft software. (Anyone could copy Windows into a computer and not pay him a penny.) Many other billionaires get their fortune from copyrights in software and entertainment or patents in pharmaceuticals, medical equipment and other areas.

The government also has rules for corporate governance that allow CEOs to rip off the companies for which they work. CEO pay typically runs close to $20 million a year, even as returns to shareholders lag. It would be hard to argue that today’s CEOs, who get 200 to 300 times the pay of ordinary workers, are doing a better job for their companies than CEOs in the 1960s and 1970s who only got 20 to 30 times the pay of ordinary workers.

Another source of inequality is the financial sector. The government has aided these fortunes in many ways, most obviously with the bailout of the big banks a decade ago. It also has deliberately structured the industry in ways that facilitate massive fortunes in financial engineering.

There is no reason to design an economy in such a way as to ensure that most of the gains from growth flow upward. Unfortunately, that has largely been the direction of policy over the last four decades.

2018 Midterm Elections in the United States

The 2018 midterms will have significant impacts on not only America but the world — see the Republicans being a more authoritarian example for other countries and being worse on issues such as climate change.

Usually the elections for federal and state offices that take place between the US presidential elections get considerably less attention than those taking place in the same year as the presidential race. This is not likely to be true in 2018.

As is always the case, the entire House of Representatives will be up for reelection. There will be elections for a third of the Senate (actually 35 of 100 senators because of a resignation) and state governors races in 36 of the 50 states, including nine of the ten largest. In addition, most state legislatures will be up for grabs in the election as well.

The main reason this election is so important is that Donald Trump has demonstrated an unprecedented level of disrespect for basic norms of democracy and the rule of law. Republicans in Congress, with almost no exceptions, have been willing to go along in his abuses of power. If the Republicans manage to maintain control of both houses of Congress, there will be little ability to block Trump’s attack on the basic institutions of democracy.

[…]

Trump and the Republican party are also looking for ways to disenfranchise voters to maintain their grip on power. It is important to recognize that the Republicans depend on being able to rule as a minority.

In 2016 Trump lost the nationwide popular vote by almost 3 million votes, or 2.1 percentage points. He nonetheless won the election because the presidential race is decided by the Electoral College in which most states the winner takes all. While electoral votes are partially proportionate to population (each state gets at least three votes regardless of its size), Trump won several large states by tiny margins, allowing him to get a majority in the Electoral College.

There is a similar story in the US Senate. Each state has two senators, which means that Wyoming, with less than 600,000 people, has the same number of senators as California with almost 40 million. With Republicans winning most of the small states’ senators, they are able to have a majority of the Senate even when they get much less than half of the vote for senators.

The House of Representatives awards seats to states based on the population. But because the Republicans controlled the last redistricting processes following the 2010 Census, they drew districts in a way that will require the Democrats to win the overall vote by 6 to 8 percentage points to retake the House. With a new Census in 2020, the governors who are elected this year will preside over the redistricting that takes place in 2021. This will be an opportunity for either party to lock in favorable districts for a decade.

There is also a basic issue of whether people are able to vote. Republicans have pursued a variety of measures intended to make it difficult for minorities to vote. In prior years, courts have overruled many of these measures since the right to vote is a fundamental right guaranteed by the constitution. In more recent years, Republican-appointed judges have approved many blatant acts of disenfranchisement. If they can maintain control of both houses of Congress, Republicans at both the federal and state level are likely to move more aggressively in implementing obstacles to minority voting.

For these reasons, there any many basic issues about democracy that will be at stake with the outcome of the 2018 election. While the US government has a long-standing democratic tradition and respect for the rule of law, these are very much up for grabs this year. We have a president and a major political party that care about neither.