AMERICAN FUTURE

Thanks to the Supreme Court, their chances have improved.

After noting that just two dozen or so individuals, couples and companies have given more than 80 percent of the money collected by SuperPACs, the New York Times delves into the backgound of three of the biggest contributors:

¶Harold Simmons, a billionaire corporate raider, has given $1 million to Mr. Gingrich’s political action committee, $1.1 million to Rick Perry’s PAC, $100,000 to Mitt Romney’s PAC, and $10 million to American Crossroads, the super PAC advised by Karl Rove that is supporting many Republican candidates. Mr. Simmons’s companies make metals, paints and chemicals, among other things, and have gotten into trouble over lead and uranium emissions from previous decades. He also runs a radioactive waste dump in Texas that has clashed with environmental regulators over its proximity to a nearby aquifer. He controls Waste Control Specialists, which has contracts to clean up federal hazardous waste sites, including emissions from other companies he controls.

¶Peter Thiel, a co-founder of PayPal and an outspoken libertarian, gave $2.6 million to Ron Paul’s PAC. In 2009, he wrote that the 1920s were the last decade when one could be optimistic about American politics, lamenting the subsequent rise of the welfare state that he blamed in part on giving women the right to vote.

¶Foster Friess, who gave $1 million to Rick Santorum’s Red White and Blue PAC, is a mutual fund manager who recently declared that aspirin used to be an effective contraceptive when women put it between their knees. He is a former president of the Council for National Policy, a secretive club of some of the country’s most powerful conservatives, which opposes unions, same-sex marriage and government regulation.

Well (as Ronald Reagan said on numerous occasions), it’s time for this blog to start focusing on American politics — a subject I’ve come close to ignoring since I started posting last June.

I’ll start with “Incoherent party, incoherent candidates” from the Economist, which hits the mark:

REPUBLICANS are clearly not too enthused about Mitt Romney. Nor are they wild for any of the alternatives . . .

Mitt Romney looks like a weak phony in this election campaign because he has to pretend to believe with all his heart in orthodox tea-party conservative positions that he transparently doesn’t really believe in. We know this because in the past, Mr Romney supported health-care reform including an individual mandate along the lines of the system he instituted in Massachusetts, essentially the same system as Obamacare. And in the past, he supported a cap-and-trade system for limiting greenhouse-gas emissions to address climate change. But at the time, both of those were orthodox Republican Party positions . . . There were very few established Republican politicians who hadn’t taken positions in the George W. Bush era (or the Newt Gingrich era!) that pose ideological problems for them in the tea-party era . . .

Republicans’ disenchantment with their current presidential candidates is not an incidental characteristic of this crop of candidates. It’s a structural feature of a contemporary Republican Party whose pieces don’t hang together. Pro-Iraq-war neoconservative Republicans cannot actually live with Ron Paul Republicans. Wall Street-hating anti-bail-out Republicans cannot actually live with Wall Street-working bail-out-receiving Republicans. Evangelical-conservative Republicans cannot actually live with libertarian, socially liberal Republicans. Deficit-slashing Republicans cannot live with tax-slashing Republicans. Medicare-cutting Republicans cannot live with Medicare-defending Republicans. These factions have been glued together over the past three years by the intensity of their partisan hatred for Barack Obama, and all of the underlying resentments that antipathy masks. Republicans have buried their differences by assaulting everything Mr Obama supports, and because Mr Obama is a pretty middle-of-the-road politician, that includes a whole lot of things that many Republicans used to support. They are disenchanted with their candidates because their candidates are incoherent, but their candidates are incoherent because the base is incoherent. If the GOP wins this election, the party’s leaders are going to be confronted with that incoherence pretty quickly.

“States’ Rights” was a burning issue in the 1950s and 1960s. It was the phrase used by the mostly Southern opponents of federally-mandated desegregation. Now, when it’s no longer socially acceptable to be overtly racist, states’ rights has reappeared under another guise.

Rick Perry, the Texas governor and Republican presidential candidate, is the author of  Fed Up!. Last fall, he was interviewed by Newsweek’s Andrew Romano. The transcript of that interview was published today by the Daily Beast. His views are remarkable, to say the least. Of particular interest is the following:

Romano: The Constitution says that “the Congress shall have Power To lay and collect Taxes… to provide for the… general Welfare of the United States.” But I noticed that when you quoted this section on page 116 [of Fed Up!], you left “general welfare” out and put an ellipsis in its place. Progressives would say that “general welfare” includes things like Social Security or Medicare—that it gives the government the flexibility to tackle more than just the basic responsibilities laid out explicitly in our founding document.  What does “general welfare” mean to you?

Perry: I don’t think our founding fathers when they were putting the term “general welfare” in there were thinking about a federally operated program of pensions nor a federally operated program of health care. What they clearly said was that those were issues that the states need to address. Not the federal government. I stand very clear on that. From my perspective, the states could substantially better operate those programs if that’s what those states decided to do.

Romano: So in your view those things fall outside of general welfare. But what falls inside of it? What did the Founders mean by “general welfare”?

Perry: I don’t know if I’m going to sit here and parse down to what the Founding Fathers thought general welfare meant.

Romano: But you just said what you thought they didn’t mean by general welfare. So isn’t it fair to ask what they did mean? It’s in the Constitution.

Perry:[Silence.]

Listening to Grover Norquist or, for that matter, all Republicans and many ordinary people, you’d think that Americans are taxed at an exorbitantly high rate and the rate keeps going up and up. It’s not true. Consider the following chart using data provided by the Organisation for Economic Co-operation and Development (OECD):

The tax burden on Americans is only 69 percent (24.0% divided by 34.8%) of the OECD average. What’s far more interesting and important is that the American tax burden rose steadily between 1983 (during the first Reagan administration) and 2000 (the last year of the Clinton administration). Interrupted only by the mild and brief 1990-1991 recession, this was a lengthy period of prosperity. During George W. Bush’s administration, the tax burden fell rapidly, from close to 30 percent to 24 percent. For most people, prosperity was elusive.

Since 1983, then, there’s been an inverse correlation between the tax burden and prosperity. Admittedly, there’s a big difference between correlation and causality. I can’t prove the counter-intuitive proposition that a higher tax burden causes prosperity or that a lower burden prevents it. However, what’s important is that the data shows that the Republican/Tea Party shibboleth that a low tax burden and prosperity are positively correlated can’t be factually substantiated. The GOP believes in a cause-and-effect relationship and can cite economists whose theories support their claim. Its fiscal policy preference is based on what they believe should be, not on what is. Alas, the gap between theory and reality can be very wide. And what fills the gap? Ideology, that’s what.

When belief and reality point in opposite directions, trouble ensues. The Republican mantra, because it conforms to “common sense,” is both appealing and understandable. From the standpoint of the individual, it’s always true that the lower the tax burden, the better. From society’s viewpoint, the facts say otherwise. This is a classic case of the fallacy of composition — that what’s good for one is necessarily good for all.

UPDATE. Two more charts showing the same thing:

A new Gallup poll shows a surprisingly small percentage of self-identified Republicans prefer to rely exclusively on spending cuts to reduce the budget deficit:

Note that, among Republicans, the “Only with spending cuts” and “Equally with spending cuts and tax increases” percentages are nearly the same. So, as a mind exercise, assign 0% to the only spending cuts group and 50% to the equally with spending cuts and tax increases group. As a rough approximation, then, these two groups, taken together, want 75% of the deficit reduction to come from spending cuts and 25% from tax increases. As I’ve previously pointed out, the House Republicans, on the basis of a study conducted by the American Enterprise Institute, have convinced themselves that at least 85% of the budget reduction must come from spending cuts. Further, both House and Senate Republicans insist that 100% of the budget reductions must come from spending cuts.

Any way you look at it, only one-in-four of the Republicans polled by Gallup share the no-compromise position of Republican Congressmen. The Congressmen maintain that they’re speaking in the name of the American people. This poll says they are not. If they aren’t, in whose name are they speaking? You be the judge.

“Job-killing” is the boilerplate phrase in just about every statement Republicans make these days. The latest prime example comes from Speaker Boehner’s blog: “Survey: Majority of Americans Oppose Job-Killing Tax Hikes Demanded by POTUS.”

Okay. Let’s assume for the sake of argument that higher taxes would “kill” jobs, even though there are examples from our country’s recent history (during the Reagan and Clinton Administrations) that show that it isn’t necessarily so. We then have to ask how the number of jobs that would be killed this way would compare to the number of jobs that would be killed by reducing government spending. After all, it’s an accounting identity that the government’s out-go is somebody else’s in-come. If out-go is reduced, so is in-come. I’m not aware of any studies that compare the magnitudes of the “job-killing” effects of raising taxes and cutting spending. Perhaps some economist somewhere has attempted this mind-numbing exercise. If so, I suspect that the result depends on his or her political persuasion.

If the Democrats wanted to (which they evidently don’t), they could come out with their version of “[ . . . . . Job-Killing . . . . . ].”

Yesterday, I asked whether another 1931 was in the offing. Now I’m asking whether another 1937 is in the offing. It seems like I’m a congenital worrier. I don’t like it, but I can’t help it. How can I be an optimist, when (1) the European Central Bank is increasing interest rates , (2) the Bank for International Settlements is advising central banks to tighten their monetary policies to prevent inflation from accelerating, (3) the European financial contagion in spreading and, most disturbingly, (4) the U.S. is on the verge of implementing substantial budget cuts that will take effect at a time of stagnating employment?

In addition to writing about these current concerns, I took a look at the 1937-1938 recession — the recession within the depression — and drew the following conclusion: changes in fiscal policy — deficit reduction and spending reduction — were major contributors to the decline in industrial production that occurred during the the 1937-1938 recession.

Are “deficit reduction” and “spending reduction” familiar? Of course they are. Both are on their way — and soon. Fortunately (for me, at least), Bruce Bartlett — who held senior policy roles in the Reagan and George H.W. Bush administrations and served on the staffs of Representatives Jack Kemp and Ron Paul — shares my concern that we may soon experience a modern day version of the 1937-1938 recession. Despite our differing political views (I’m a lifelong independent, which he clearly isn’t), we see the situation in a similar, if not identical, light.

I see nothing to argue with in his Economix post, which asks “Are We About to Repeat the Mistakes of 1937?” In the following, the emphases are mine.

It is starting to look like 1937 all over again. As the table below indicates, the economy made a significant recovery after hitting bottom in 1932, when real gross domestic product fell 13 percent. The contraction moderated considerably in 1933, and in 1934 growth was robust, with real G.D.P. rising 11 percent. Growth was also strong in 1935 and 1936, which brought the unemployment rate down more than half from its peak and relieved the devastating deflation that was at the root of the economy’s problems.

By 1937, President Roosevelt and the Federal Reserve thought self-sustaining growth had been restored and began worrying about unwinding the fiscal and monetary stimulus, which they thought would become a drag on growth and a source of inflation. There was also a strong desire to return to normality, in both monetary and fiscal policy.

On the fiscal side, Roosevelt was under pressure from his Treasury secretary, Henry Morgenthau, to balance the budget. Like many conservatives today, Mr. Morgenthau worried obsessively about business confidence and was convinced that balancing the budget would be expansionary. In the words of the historian John Morton Blum, Mr. Morgenthau said he believed recovery “depended on the willingness of business to increase investments, and this in turn was a function of business confidence,” adding, “In his view only a balanced budget could sustain that confidence.”

Roosevelt ordered a very big cut in federal spending in early 1937, and it fell to $7.6 billion in 1937 and $6.8 billion in 1938 from $8.2 billion in 1936, a 17 percent reduction over two years.

At the same time, taxes increased sharply because of the introduction of the payroll tax. Federal revenues rose to $5.4 billion in 1937 and $6.7 billion in 1938, from $3.9 billion in 1936, an increase of 72 percent. As a consequence, the federal deficit fell from 5.5 percent of G.D.P. in 1936 to a mere 0.5 percent in 1938. The deficit was just $89 million in 1938.

At the same time, the Federal Reserve was alarmed by inflation rates that were high by historical standards, as well as by the large amount of reserves in the banking system, which could potentially fuel a further rise in inflation. Using powers recently granted by the Banking Act of 1935, the Fed doubled reserve requirements from August 1936 to May 1937. Higher reserve requirements restricted the amount of money banks could lend and caused them to tighten credit.

This combination of fiscal and monetary tightening – which conservatives advocate today – brought on a sharp recession beginning in May 1937 and ending in June 1938, according to the National Bureau of Economic Research. Real G.D.P. fell 3.4 percent in 1938, and the unemployment rate rose to 12.5 percent from 9.2 percent in 1937.

Economists are still debating the precise causes of the 1937-8 recession. While most say they believe that fiscal tightening is primarily to blame, some disagree. Perhaps it would have been positive if tightening was confined to the spending side of the budget, without the large increase in taxes. Maybe the fiscal contraction would have been benign if the Fed hadn’t tightened monetary policy simultaneously.

Given President Obama’s endorsement of large budget cuts, the only question now appears to be how much fiscal policy will tighten and how fast. If it is back-loaded and mainly involves cuts in transfer programs, the impact on growth may be modest. But if – as I suspect Republicans will demand – the spending cuts are front-loaded and involve reductions in government consumption and investment spending, the impact could be severe.

While it’s unlikely that the Fed will repeat its error of 1936-7 and raise reserve requirements or the federal funds rate, it has already begun de facto tightening by moving from monetary stimulus to a more neutral stance. Moreover, with interest rates on Treasury bills hovering near zero, there is little it can do to stimulate growth on the monetary side.

While the odds of another recession are still low, they are increasing. Given the economy’s fragility, policy makers need to be very careful, because it may take only a small misstep on either the monetary or fiscal side to tip the balance. The experience of 1937-38 should be a warning.

Yes, there’s reason to worry. What if both a 1931 and a 1937 are in the offing?

The leader (editorial) in the current issue of The Economist addresses our debt problem. It takes special note of the proposed split between spending cuts and tax increases:

Earlier this year House Republicans produced a report noting that an 85%-15% split between spending cuts and tax rises was the average for successful fiscal consolidations, according to historical evidence.

The report to which The Economist refers, dated March 15, was authored by the Republicans on the House Joint Economic Committee. Some of the “Highlights” of this “empirically-based” report are as follows:

Fiscal consolidation programs that rely predominately or entirely on spending reductions are more likely to achieve their goals of government budget deficit reduction and debt stabilization as a percentage of GDP than programs that rely primarily on tax increases.

In the long term, fiscal consolidation programs that reduce government spending as a percentage of GDP accelerate economic growth.In the short term, fiscal consolidation programs that rely predominately or entirely on spending reductions have expansionary “non-Keynesian” effects that may offset the contractionary Keynesian reduction in aggregate demand. [Emphasis added]

In some cases, “non-Keynesian” effects may be strong enough to make fiscal consolidation programs expansionary in the short term. [Emphasis added]

Can it possibly be true that, in the short-term, reduced government spending (“fiscal consolidation programs”) could produce “non-Keynesian” effects that would offset — or even more than offset — Keynesian effects? Remember this equation from Economics 101:

Gross Domestic Product = Consumption + Investment + Government  + Net Exports

The Republican argument boils down to this: a reduction in government spending will, in the short term, be compensated for by increases in consumption and/or investment (because it’s a small number, net exports can be ignored). The increases in consumption and/or investment might even be larger than the decrease in government spending.

If only this were true. The immediate effect of “fiscal consolidation programs” will be to reduce employment directly, through reductions in the sizes of the federal government workforce and in the workforces of companies dependent on federal contracts; and, indirectly, on the private sector businesses that provide goods and services to those people and firms directly effected. Would an economic environment in which fiscal policy puts short-term pressure on consumption provide an incentive for business to accelerate spending on property, plant and equipment? Quite the opposite.

But what about the “empirically-based” House report? Well, it turns out that it relied on a single study written by the American Enterprise Institute in reaching its conclusions:

Economists Andrew Biggs, Kevin Hassett, and Matt Jensen demonstrated that the degree of success in reducing budget deficits and stabilizing the debt-to-GDP ratio correlates to the share of spending cuts in fiscal consolidation programs. Biggs, Hassett, and Jensen found that successful fiscal consolidations averaged 85% spending cuts and 15% revenue increases, while unsuccessful fiscal consolidations averaged 47% spending cuts and 53% revenue increases.

Elsewhere in The Economist (in the “Free Exchange” section), we find this:

Having just read the Biggs, Hasset and Jensen paper, I note two features. First, the vast majority of the successful consolidations studied took place in Europe, in particular Scandinavia, Italy and Portugal. Scandinavian and southern European governments tend to tax more and spend more than America’s (as a percentage of GDP). They may therefore have more public-spending fat to cut than America, and less scope to raise taxes.

Second, the study relies on a dataset which the IMF rejected for, “[failing] to identify consolidations when governments took substantial actions to reduce the deficit, but the actions were associated with severe economic downturns”. When Biggs, Hasset and Jensen apply their methodology to fiscal consolidations which the IMF define as successful, “the lowest expenditure share for a successful fiscal consolidation was just over 66% and the highest just under 83%”.

Put simply, no fiscal consolidation that the IMF has judged to be successful relied on public spending cuts for more than 83% of its impact. In successful fiscal consolidations, tax rises accounted for between 17% and 33% of deficit-reduction measures.

Cherry-picking, indeed.

Earlier today, the House Committee on the Budget posted a report “demonstrating that economic hardships have been made worse by Washington’s misguided interventions and the lack of a credible plan to lift the crushing debt burden.”

To “prove” this, the report displays two charts. The first, a scatter chart having “Government purchases as percent of GDP” on the x-axis and “Unemployment rate” on the y-axis:

Sure enough, as the government’s share of the economy goes up, so does the unemployment rate. But does this mean that the increase in the unemployment rate is caused by the rise in the government’s share? No, it doesn’t. Why not? Well, answer this question: under what circumstances does the government spending-to-GDP ratio rise? The answer: when the economy is weakening. At such times, the growth rate of private spending turns down and the growth rate of government spending turns up — due, for instance, to increased unemployment insurance outlays. Simply stated, jumps in the government spending-to-GDP ratio are the result of — not the cause of — increasing unemployment rates. Mr. Ryan should know better than to unload a spurious correlation on the American public. But he has a political agenda.

The second chart displays two time series: the investment-to-GDP ratio and the unemployment rate:

The two time series are nearly perfect mirror images, seemingly proving Mr. Ryan’s point. The problem is that they are too nearly perfect. It takes time for an acceleration of investment spending to result in accelerating employment growth. In other words, changes in employment should lag changes in investment. There’s no perceptible lag in Chart 2.

The source of Chart 2 (as well as Chart 1) is John B. Taylor’s blog. The post containing these charts doesn’t indicate where the data used to create the charts came from.

The following two paragraphs (including the bold lettering) are taken verbatim from the Think Progress blog:

Brooks’ plea for sanity was lost on House Budget Committee Chairman Paul Ryan (R-WI), who responded to the column on conservative radio host Laura Ingraham’s show this morning. Ryan said that if Republicans gave up the loopholes now without securing a deal to lower marginal tax rates overall, they would lose an opportunity to demand new tax cuts in the future:

RYAN: What happens if you do what he’s saying, is then you can’t lower tax rates. So it does affect marginal tax rates. In order to lower marginal tax rates, you have to take away those loopholes so you can lower those tax rates. If you want to do what we call being revenue neutral … If you take a deal like that, you’re necessarily requiring tax rates to be higher for everybody. You need lower tax rates by going after tax loopholes. If you take away the tax loopholes without lowering tax rates, then you deny Congress the ability to lower everybody’s tax rates and you keep people’s tax rates high.

Now I finally understand where Ryan and his Republican colleagues are coming from: (1) because Republicans are always in favor of lowering tax rates, the only reason why tax rates can’t be lowered is that Democrats are against lowering them; (2) since the Democrats will prevent tax rates from being lowered, eliminating tax loopholes will increase the overall tax rate by increasing the effective tax rate of those who are the beneficiaries of the tax loopholes; (3) each and every tax loophole is therefore desirable in principle; i.e, regardless of whether it helps or hurts the economy, and, finally, (4) minimizing the effective tax rate should be the one and only objective of fiscal policy.

Ryan’s objective is to create a standard for fiscal policy that can be likened to the standard for monetary policy — the gold standard — that most experts agree greatly contributed to the severity and duration of the Great Depression. The monetary policies of countries that adhered to the gold standard were extraordinarily simple: their objective was to keep the exchange rates of their currencies absolutely stable, regardless of the domestic economic consequences of so doing.  Minimizing the effective tax rate is to fiscal policy what maintaining absolute exchange rate stability was to the gold standard monetary policy. Like its predecessor, it would create an economic straitjacket. And like its predecessor, it would ignore the economic consequences of that straitjacket.