The Triumph of the Right

by robert reich

Conservative Republicans have lost their fight over the shutdown and debt ceiling, and they probably won’t get major spending cuts in upcoming negotiations over the budget.

But they’re winning the big one: How the nation understands our biggest domestic problem.

They say the biggest problem is the size of government and the budget deficit.

In fact our biggest problem is the decline of the middle class and increasing ranks of the poor, while almost all the economic gains go to the top.

The Labor Department reported Tuesday that only 148,000 jobs were created in September — way down from the average of 207,000 new jobs a month in the first quarter of the year.

Many Americans have stopped looking for work. The official unemployment rate of 7.2 percent reflects only those who are still looking. If the same percentage of Americans were in the workforce today as when Barack Obama took office, today’s unemployment rate would be 10.8 percent.

Meanwhile, 95 percent of the economic gains since the recovery began in 2009 have gone to the top 1 percent. The real median household income continues to drop, and the number of Americans in poverty continues to rise.
So what’s Washington doing about this? Nothing. Instead, it’s back to debating how to cut the federal budget deficit.

The deficit shouldn’t even be an issue because it’s now almost down to the same share of the economy as it’s averaged over the last thirty years.

The triumph of right-wing Republicanism extends further. Failure to reach a budget agreement will restart the so-called “sequester” — automatic, across-the-board spending cuts that were passed in 2011 as a result of Congress’s last failure to agree on a budget.
These automatic cuts get tighter and tighter, year by year — squeezing almost everything the federal government does except for Social Security and Medicare. While about half the cuts come out of the defense budget, much of the rest come out of programs designed to help Americans in need: extended unemployment benefits; supplemental nutrition for women, infants and children; educational funding for schools in poor communities; Head Start; special education for students with learning disabilities; child-care subsidies for working families; heating assistance for poor families. The list goes on.

The biggest debate in Washington over the next few months will be whether to whack the federal budget deficit by cutting future entitlement spending and closing some tax loopholes, or go back to the sequester. Some choice.

The real triumph of the right has come in shaping the national conversation around the size of government and the budget deficit – thereby diverting attention from what’s really going on: the increasing concentration of the nation’s income and wealth at the very top, while most Americans fall further and further behind.

Continuing cuts in the budget deficit – through the sequester or a deficit agreement — will only worsen this by reducing total demand for goods and services and by eliminating programs that hard-pressed Americans depend on.

The President and Democrats should re-frame the national conversation around widening inequality. They could start by demanding an increase in the minimum wage and a larger Earned Income Tax Credit. (The President doesn’t’ even have to wait for Congress to act. He can raise the minimum wage for government contractors through an executive order.)

Framing the central issue around jobs and inequality would make clear why it’s necessary to raise taxes on the wealthy and close tax loopholes (such as “carried interest,” which enables hedge-fund and private-equity managers to treat their taxable income as capital gains).

It would explain why we need to invest more in education – including early-childhood as well as affordable higher education.

This framework would even make the Affordable Care Act more understandable – as a means for helping working families whose jobs are paying less or disappearing altogether, and therefore in constant danger of losing health insurance.

The central issue of our time is the reality of widening inequality of income and wealth. Everything else — the government shutdown, the fight over the debt ceiling, the continuing negotiations over the budget deficit — is a dangerous distraction. The Right’s success in generating this distraction is its greatest, and most insidious, triumph.

Obama’s Absurd Sequester Scheme

Making a Terrible Situation Worse
by DEAN BAKER


The big talk in Washington this month is the sequester cuts. These cuts are roughly 8 percent of most areas of discretionary spending, both military and domestic. While the cuts became effective at the start of March, many will first begin to pinch this month since government contracts generally require 30 day advance notice for leaves or furloughs. This means that cuts in areas such as airport security, food inspectors, and air traffic controllers are just now taking effect.

The Democrats have been yelling loudly about the damage that these cuts will inflict on specific programs and the economy as a whole. They do have a case. The cuts will whittle back spending in a wide variety of areas. Some of these, like the cuts to airport security and food inspections will have an immediate impact. We will see longer lines at airports and are more likely to find ourselves eating contaminated meat.

The impact of other cuts, like reductions in spending on infrastructure maintenance and medical research, will only be seen over the long-term. We will see a gradual worsening in the quality of the infrastructure and less medical progress.

In addition, the reduction in spending at a time when the economy is already weak will further slow growth and weaken job creation. The March jobs report helped to remind everyone of this problem. The economy created just 88,000 jobs in March, less the number needed just to keep pace with the growth of the labor force.
For some bizarre reason, prior to the release of the report many economists were making bold claims about how the economy had turned the corner and the recovery was picking up steam. It’s not clear what these folks had been smoking.

The economy was growing at just a 1.7 percent annual rate in the second half of last year. The most recent data on new orders for equipment showed that investment was just even with its year ago pace. And the rate of job creation over the prior five months was actually down by an average of 40,000 from the same months a year earlier.
None of this looked like a story of accelerating growth. Thankfully the March jobs report helped bring the discussion of the economy back to reality. The experts again recognized that we have a problem of a seriously depressed economy that is at best just growing rapidly enough to keep pace with its underlying potential, meaning that it is making up none of the lost ground from the downturn.

In this context, the hit from the sequester is clearly bad news. The Congressional Budget Office projects that it will reduce growth in 2013 by 0.5 percentage points costing as many as 700,000 jobs. With the sequester in place there is a high probability that the unemployment rate will be higher at the end of the year than it was at the beginning.

But there is a limit to how much President Obama and the Democrats can really complain about the sequester. The reason is that President Obama himself set a course for large cuts in discretionary spending. His budget for 2012, which was put out before the deal with the Republican Congress, called for discretionary spending to be 7 percent less in 2021 than it had been in 2010, in nominal dollars. This budget would have implied cuts in services of more than 40 percent since the economy was projected to be more than 60 percent larger in 2021 than in 2012. This means that most of the bad stories that we are hearing about from the sequester cuts likely would have been the result of the cuts that President Obama had laid out himself, even if they would have been phased in more slowly.

The furloughs and layoffs of public sector workers also have their roots with President Obama. After all, it was his idea to freeze the pay of federal employees back in 2011, implying that we have a problem with overpaid government workers. Is it a surprise that the Republicans want to push the attack one step further?

And President Obama basically accepted the Republicans’ framing of the story of the downturn which turned reality on its head with the line about out of control budget deficits. Fans of arithmetic know that the large budget deficits are the result of the economic collapse. In fact budget deficits were modest prior to the downturn and were projected to remain small even if the Bush tax cuts were no allowed to expire at the end of 2010 as originally scheduled.

In this context, it is a bit hard to get too excited about the sequester. Yes, it is very bad news, but we were looking at the prospect of large cuts to the budget even before the sequester. And yes, it will slow growth and increase unemployment, but we were already looking at a government that seemed content to allow the country to needlessly lumber through a prolonged period of high unemployment.

The sequester makes a terrible situation somewhat worse, but the idea that everything would be just fine if we just stopped the sequester is nuts. We should be talking about reversing the austerity agenda more generally. The Democrats’ hysterics about the sequester should be recognized as the theater it is.

Even worse the idea pushed by President Obama, that we should be prepared to accept large cuts to Social Security and Medicare to get back to the slow motion sequester is almost too absurd for words. If he raised this plan anywhere other than Washington he would have been laughed out of town. Certainly those of us who do not work for hacks and hedge funds should treat this scheme with the derision it deserves.

The Bad News About Jobs

The Coming Contraction
by DEAN BAKER


More than five years into the downturn it doesn’t take much to get people excited about the state of the economy. The Labor Department’s February employment report showing the economy generated a better-than-expected 236,000 jobs and the unemployment rate had fallen 0.2 percentage points to 7.7 percent was sufficient to get the optimists’ blood flowing. Unfortunately, they are likely to be disappointed.

First off, if the 236,000 jobs number sounds good to you than you probably are not old enough to remember 271,000 number reported last February or the 311,000 number reported in January of 2012. The strong winter job growth was followed by a dismal spring in which job growth slowed to a trickle.

While most economic measures implied that the economy suddenly shifted from hot to cold, the more obvious explanation was that unusually good winter weather in the Northeast and the Midwest pulled hiring forward, as some of us warned at the time. This is likely part of the story this year as well.

While few people in the northern part of the country have been sunbathing in January and February, we did not see the sort of severe snowstorms or sub-zero weather that typically leads to a few days without work in at least part of the region. This likely explains the 48,000 job growth reported for construction in February, as well as higher-than-expected growth in retail and temporary employment.

The drop in the unemployment rate is also not as good news as it may initially seem. The Labor Department reported that 130,000 people left the labor force in the month so they are no longer counted as unemployed. The percentage of the adult population that is employed—the employment-to-population ratio (EPOP) – was unchanged at 58.6 percent. This is just 0.4 percentage points above the low hit in the summer of 2011 and is unchanged over the last year.

While the unemployment rate has fallen back by 2.3 percentage points from its peak, reversing more than 40 percent of its increase, the EPOP is still down by 4.5 percentage points from its pre-recession level. The drop in unemployment is much more the result of people giving up the search for employment and leaving the labor force than workers finding new jobs.

The one genuinely encouraging piece of news in the February employment data is an uptick in wage growth. Over the last three months, average hourly earnings rose at a 2.85 percent annual rate compared with the prior three months. If this continues it would imply that workers are actually seeing real wage gains. Unfortunately, this increase was likely driven by some state minimum wage increases and the sort of random movements that causes these data to fluctuate erratically, but this is an item that the optimists can look to for hope.

Looking beyond this report, there is not much reason for optimism. Housing construction is rising but from a very low base. It had fallen back to just 2.0 percent of GDP, so even a 20 percent growth rate would add just 0.4 percentage points to GDP growth. The most recent data on investment shows a sharp drop, albeit after 3 months of good growth. We will be fortunate if this category grows at more than a 10 percent annual rate in 2013.

While an upward revision to the 4th quarter GDP data turned a negative 0.1 percent into a positive 0.1 percent, the economy still only grew at a 1.6 percent annual rate in the second half of 2012. Apart from the uptick in construction, there are few good reasons to expect much of an acceleration from this growth rate. On the other hand, the ending of the payroll tax cut will pull more than $100 billion a year out of the economy. The impact of this tax increase was just being felt when the February jobs survey was taken in the middle of the month.

The other big hit to the economy will be from the sequester, which will pull roughly $80 billion in federal spending out of the economy. The forecasts from the Congressional Budget Office and others show the sequester slowing growth by 0.5-0.6 percentage points. The economy has not even begun to feel the impact of these cuts, most of which will not start to effect until April.

In short, we have an economy that had been growing at a not very healthy pace through the second half of 2012 that is virtually certain to be slowed by contractionary fiscal policy through the rest of 2013. Unless there is a rapid reversal of policy, the 7.7 percent unemployment rate is likely to represent a low that we may not see again for some time. While the economy is not likely to fall into a recession and send the unemployment rate soaring, the economy is not growing fast enough to meet the need for jobs from a growing labor force. As a result unemployment will be going in the wrong direction for the rest of the year.

The Sequester, Explained

—By Kevin Drum| Mother Jones

Where did the whole idea of sequestration originate? 

It goes back to 1985. The tax cuts of Ronald's Reagan early years, combined with his aggressive defense buildup, produced a growing budget deficit that eventually prompted passage of the Gramm-Rudman-Hollings Act. GRH set out a series of ambitious deficit reduction targets, and to put teeth into them it specified that if the targets weren't met, money would automatically be "sequestered," or held back, by the Treasury Department from the agencies to which it was originally appropriated. The act was declared unconstitutional in 1986, and a new version was passed in 1987.

Sequestration never really worked, though, and it was repealed in 1990 and replaced by a new budget deal. After that, it disappeared down the Washington, DC, memory hole for the next 20 years.

What about the 2013 version? Where did that come from? 

 In the summer of 2011, Republicans decided to hold the country hostage, insisting that they'd refuse to raise the debt ceiling unless President Obama agreed to substantial deficit reduction.

After months of negotiations over a "grand bargain" finally broke down in July, Republicans proposed a plan that would (a) make some cuts immediately and (b) create a bipartisan committee to propose further cuts down the road. But they wanted some kind of automatic trigger in case the committee couldn't agree on those further cuts, so the White House hauled out sequestration from the dustbin of history as an enforcement mechanism. It would go into effect automatically if no deal was reached.

In the end, no immediate cuts were made, but a "supercommittee" was set up to propose $1.5 trillion in deficit reduction later in the year. To make sure everyone was motivated to make a deal, the sequester was designed to be brutal: a set of immediate, across-the-board cuts to both defense spending and domestic spending, starting on January 1, 2013. The idea was that everyone would hate this so much they'd be sure to agree on a substitute.

Needless to say, no such agreement was reached. So now we're stuck with the automatic sequestration cuts.

How big is the sequester?  

You'd think this would be an easy question to answer. In fact, it's surprisingly complicated! Are you ready?

The basic amount of the sequester is $1.2 trillion in deficit reduction over 10 years. But when you reduce spending, you also reduce interest on the national debt. This means that we only need $984 billion in actual program cuts. And since it's for 10 years, naturally that means we divide by nine to get annual spending cuts of $109 billion. For FY2013, this comes to $12 billion per month, because there are only nine months from January (when the sequester begins) through the end of the fiscal year in September.

But wait! The fiscal cliff deal in January delayed the sequester until March 1, so it also lopped off two months of cuts. This means that the total amount of spending cuts for this year clocks in at $85 billion.

So what gets cut? 

The sequester is split evenly between defense spending and domestic spending. The domestic half has two parts: Medicare and everything else. For Medicare, the sequester specifies a flat 2 percent cut in reimbursements. Doctors will continue to bill at their usual rate, but they'll only receive 98 cents on the dollar. According to the Congressional Budget Office, here's how the whole thing nets out (see Table 1-2):

• Defense: $42.7 billion
• Medicare: $9.9 billion
• Other domestic: $32.7 billion

Aside from Medicare, how are the other cuts divvied up?  

The sequester legislation requires the cuts to come evenly from every budget account. This means everything (with a few exceptions) gets cut the same amount. This is an especially stupid way to cut spending, since everyone agrees that some programs are more important than others, but that's the way it is. If you really want to torture yourself, you can read this Office of Management and Budget report, which contains 224 pages listing the sequester amounts from every single agency in the United States government. It's followed by another 158 mind-numbing pages of agency accounts that are exempt from the sequester.

But as stupid as this is, don't get too excited about it. It's only for FY2013, which lasts seven more months. After that, although the total amount stays in place ($109 billion, split evenly between defense and domestic spending), congressional appropriations committees have much more flexibility about how to juggle the cuts.

Aren't we still in a recession? What are these cuts going to do to the economy?  

Technically, we're no longer in a recession, but there's no question the economy remains weak. A big bunch of dumb spending cuts is about the last thing we need.

That said, the actual impact of the cuts is hazy. Among private forecasting firms, Macroeconomic Advisers figures the sequester will cut GDP by 0.7 percentage points, while IHS Global Insight puts it at 0.3 percent. Back before the sequester was delayed, CBO estimated 0.8 percentage points. Given a consensus growth forecast of about 2 percent for this year, this is a fairly substantial headwind. In terms of jobs, it will probably increase the unemployment rate by about half a percentage point. This is why Fed chairman Ben Bernanke basically told Congress on Tuesday that they were nuts to let the sequester proceed.

That's all sort of bloodless. How about some horror stories? You know, three-hour waits at airports because of TSA cutbacks, food poisoning epidemics thanks to USDA cutbacks, that sort of thing?  

The White House has been making a lot of hay over its 50-state breakdown of cutbacks. California, for example, will lose 1,200 teachers, 8,200 Head Start slots, 49,000 HIV tests, $5 million in meals for seniors, etc. You can see the forecasts for your state here. Aside from that, Wonkblog seems to be the go-to site for alarmist coverage of the sequester. Brad Plumer has the impact on R&D spending here. In an interview with Ezra Klein, former NIH director Elias Zerhouni says it will be a "disaster for research." Suzy Khimm interviews a former Homeland Security official here who says smuggling will increase. And MoJo's own Zaineb Mohammed lists six ways the sequester will hurt the environment here, including higher risk of damage from wildfires.

That's terrible! Does anyone have a plan to avoid the sequester? 

 Sure. Sort of. President Obama has proposed a substitute that includes about $1.1 trillion in spending cuts and $700 billion in new revenue. It was dead on arrival because Republicans are flatly unwilling to consider any plan that includes higher taxes. Back in December, Republicans in the House passed a bill that would have kept all the domestic cuts and replaced the defense cuts with yet more domestic cuts, mostly to anti-poverty programs. It was DOA too, for obvious reasons. House and Senate Democrats have plans as well.

But the truth is that there's probably no deal to be made. Republicans won't accept tax hikes, Democrats won't accept any bill that's exclusively spending cuts, and neither party is willing to just kill the sequester outright, which is the most sensible option. For now, all that's really happening is that both sides are barnstorming the country blaming the other guys. Obama seems to be winning that battle at the moment.

Obama Could End the Sequester

President Obama has revealed his real preferences in the current blame game by not calling for a clean bill eliminating the Sequester.
February 27, 2013 | By William K. Black

We are in the midst of the blame game about the “Sequester.” I wrote last year  about the fact that President Obama had twice blocked Republican efforts to remove the Sequester. President Obama went so far as to issue a veto threat to block the second effort. I found contemporaneous reportage on the President’s efforts to preserve the Sequester – and the articles were not critical  of those efforts. I found no contemporaneous rebuttal by the administration of these reports.

In fairness, the Republicans did “start it” by threatening to cause the U.S. to default on its debts in 2011. Their actions were grotesquely irresponsible and anti-American. It is also true that the Republicans often supported the Sequester.

The point I was making was not who should be blamed for the insanity of the Sequester. The answer was always both political parties. I raised the President’s efforts to save the Sequester because they revealed his real preferences. Those of us who teach economics explain to our students that what people say about their preferences is not as reliable as how they act. Their actions reveal their true preferences. President Obama has always known that the Sequester is terrible public policy. He has blasted it as a “manufactured crisis .”

The administration has stated publicly the three reasons this is so. First, the Sequester represents self-destructive austerity. Indeed, it would be the fourth act of self-destructive austerity. The August 2011 budget deal already sharply limited spending and the January 2013 “fiscal cliff” deal raised taxes on the wealthiest Americans and restored the full payroll tax. The cumulative effect of these three forms of austerity has already strangled the (modest) recovery – adding the Sequester, particularly given the Eurozone’s austerity-induced recession, could tip us into a gratuitous recession.

Second, the Sequester is a particularly stupid way to inflict austerity on a Nation. It is a bad combination of across the board cuts – but with many exemptions that lead to the cuts concentrating heavily in many vital programs that are already badly underfunded.

Third, conservatives purport to believe in what Paul Krugman derisively calls the “confidence fairy.” They assert that uncertainty explains our inadequate demand. The absurd, self-destructive austerity deals induced or threatened by the Sequester have caused recurrent crises and maximized uncertainty. They also show that the U.S. is not ready for prime time.

When he acted to save the Sequester, Obama proved that he preferred the Sequester to the alternative. When the alternative threatened by the Republicans was causing a default on the U.S. debt (by refusing to increase the debt limit), one could understand Obama’s preference (though even there I would have called the Republican bluff). The Republicans, however, had extended the debt limit in both of the cases that President Obama acted to save the Sequester in 2011.

Similarly, President Obama has revealed his real preferences in the current blame game by not calling for a clean bill eliminating the Sequester. It is striking that as far as I know (1) neither Obama nor any administration official has called for the elimination of the Sequester and (2) we have a fairly silly blame game about how the Sequester was created without discussing the implications of Obama’s continuing failure to call for the elimination of the Sequester despite his knowledge that it is highly self-destructive.

The only logical inference that can be drawn is that Obama remains committed to inflicting the “Grand Bargain” (really, the Grand Betrayal) on the Nation in his quest for a “legacy” and continues to believe that the Sequester provides him the essential leverage he feels he needs to coerce Senate progressives to adopt austerity, make deep cuts in vital social programs, and to begin to unravel the safety net. Obama’s newest budget offer includes cuts to the safety net and provides that 2/3 of the austerity inflicted would consist of spending cuts instead of tax increases. When that package is one’s starting position the end result of any deal will be far worse.
In any event, there is a clear answer to how to help our Nation. Both Parties should agree tomorrow to do a clean deal eliminating the Sequester without any conditions. By doing so, Obama would demonstrate that he had no desire to inflict the Grand Betrayal.