Regan’s Dream realized, it’s midnight in America

Again on the subject of Krugman’s column yesterday there are very serious economic problems all over this country. And, as has been the case over the last 10 years, we hear the familiar refrain of not since the 1930′s….[insert bad economic sign here]. Here’s one take on yesterday’s column, Devolving America — the Reagan Revolution.

This is the Reagan Revolution. I hate to be blunt, but anyone who voted twice for Reagan voted for this — the devolution of America.

It was always an ugly trade — Lee Atwater and his ilk shouting code at angry America, blissfully stoned on Dirty Harry and Death Wish fantasies. And America, tubed out on Judge Hardass, awash in happy congratulatory dreams, thinking itself bullet-proof (it still does), thinking it would never find itself cutting down the last tree on the island.

Those trees are being cut as we watch . . . and commandeered as escape pods by the only people with means to escape, the real beneficiaries of the Reagan Revolution. (I’m looking at you, Bob Rubin. You’ve got ilk too.)

The reason this persists has more to do with greed and indifference, and now pride, than it has to do with anything else. The wealthy, the banksters, and their lobbyists in this country will do everything possible – propaganda, deficit scare tactics, and the supposed “inflation fears” excuse – to try and hold onto their money and avoid having to pay their fair share in taxes.  And there are still too many elected politicians in this country that are indifferent to the current suffering of the American people.  But worst of all is the likely pride, of those in the Obama Administration that designed to way too small stimulus, to admit they were wrong.

Here’s the latest sign(s) that a depression may still be in our future:

Federal Reserve Meets, Unlikely to Change Policy Course.

This morning, members of the Federal Open Market Committee are meeting to discuss the country’s monetary policy. They are expected to release a report at 2:15 p.m. reiterating the troubles in the economy and stating the Federal Reserve will keep interest rates near zero for an “extended period.” But with the recovery stalling out, unemployment high, prices on the verge of deflation and some talk of a double dip, many are hoping the central bank might do more.

Economists such as Paul Krugman have recommended aggressive policy maneuvers to bring down unemployment and aid the recovery. Ben Bernanke, the head of the Federal Reserve, himself has said the central bank might consider less conventional policies. The Fed could raise the inflation target. It could make additional asset purchases. It could make harder statements about its commitment to recovery. It could pay banks less to keep money at the central bank.

Incomes Fall in Most Metro Areas.

Personal incomes fell across the U.S. last year except in areas with a high concentration of federal government and military jobs, the Commerce Department said Monday. They declined most in places with a lot of housing and finance jobs.

Among the 52 metro areas with populations of more than one million, in only three did both net earnings and the broader measure of personal income both rise.

All three had strong ties to the federal government: the Washington, D.C., area and two areas with a large military presence, San Antonio and Virginia Beach, Va. In all three, the biggest gains were among workers in the federal government and the military; private sector compensation fell.

The same picture was reflected nationally, as private employers froze and in many cases reduced workers’ pay and hours.

The only other big metro areas with rising personal incomes—Baltimore and Pittsburgh—had falling net earnings but a sharp increase in government checks, such as unemployment benefits.  (Here are the charts.)

In other words it’s a classic Keynesian situation. The private sector is either incapable or unwilling to hire new employees so the only entity able to do so right now is the Federal Government.

In 1980 our country started out on a different path. An anti-government/anti-New Deal crusade that was initiated by the grassroots conservatives who took over the GOP in 1964 and nominated Barry Goldwater for President. It came to fruition when Ronald Reagan was elected President. It is that path that has brought us to our current state where our current President, who campaigned on change, is politically unable, for whatever reason, to actually step out and lead us to that change.  Only the government can save us now.

As we descend into neo-Hooverism things will likely get worse before they get better. While those in power and with the money continue to horde both, the American people are being left in the dark.  Hopefully a mid-term shellacking will wake up our President – bring him into the light – and what’s left of his party to finally start fighting for the people.  Because we really need that.

It’s midnight in America and time for the American people to show their power and turn the lights back on before the morning comes again.

The Reagan, Bush, Bush bill is coming due

This puts the last 30 years in perspective. Voodoo economics was never about economics, it was a political ploy. We’ve let it go on too long and it’s time for the wealthy to start paying their fair share again. The political genius of supply-side economics. And it should start with ending the Bush Tax Cuts for the wealthy.

To understand modern Republican thinking on fiscal policy, we need to go back to perhaps the most politically brilliant (albeit economically unconvincing) idea in the history of fiscal policy: “supply-side economics”. Supply-side economics liberated conservatives from any need to insist on fiscal rectitude and balanced budgets. Supply-side economics said that one could cut taxes and balance budgets, because incentive effects would generate new activity and so higher revenue.

The political genius of this idea is evident. Supply-side economics transformed Republicans from a minority party into a majority party. It allowed them to promise lower taxes, lower deficits and, in effect, unchanged spending. Why should people not like this combination? Who does not like a free lunch?

How did supply-side economics bring these benefits? First, it allowed conservatives to ignore deficits. They could argue that, whatever the impact of the tax cuts in the short run, they would bring the budget back into balance, in the longer run. Second, the theory gave an economic justification – the argument from incentives – for lowering taxes on politically important supporters. Finally, if deficits did not, in fact, disappear, conservatives could fall back on the “starve the beast” theory: deficits would create a fiscal crisis that would force the government to cut spending and even destroy the hated welfare state.

That’s it!! Voodoo/Trickle-on/”supply-side” economics was always about driving up deficits so high to force cutting social programs. That’s why Obama’s Catfood Commission is so horrible. And this idiotic political strategy continuing means bad news for our nation and the world economically.

Since the fiscal theory of supply-side economics did not work, the tax-cutting eras of Ronald Reagan and George H. Bush and again of George W. Bush saw very substantial rises in ratios of federal debt to gross domestic product. Under Reagan and the first Bush, the ratio of public debt to GDP went from 33 per cent to 64 per cent. It fell to 57 per cent under Bill Clinton. It then rose to 69 per cent under the second George Bush. Equally, tax cuts in the era of George W. Bush, wars and the economic crisis account for almost all the dire fiscal outlook for the next ten years (see the Center on Budget and Policy Priorities).

Today’s extremely high deficits are also an inheritance from Bush-era tax-and-spending policies and the financial crisis, also, of course, inherited by the present administration. Thus, according to the International Monetary Fund, the impact of discretionary stimulus on the US fiscal deficit amounts to a cumulative total of 4.7 per cent of GDP in 2009 and 2010, while the cumulative deficit over these years is forecast at 23.5 per cent of GDP. In any case, the stimulus was certainly too small, not too large.

The evidence shows, then, that contemporary conservatives (unlike those of old) simply do not think deficits matter, as former vice-president Richard Cheney isreported to have told former treasury secretary Paul O’Neill. But this is not because the supply-side theory of self-financing tax cuts, on which Reagan era tax cuts were justified, has worked, but despite the fact it has not. The faith has outlived its economic (though not its political) rationale.

So, when Republicans assail the deficits under President Obama, are they to be taken seriously? Yes and no. Yes, they are politically interested in blaming Mr Obama for deficits, since all is viewed fair in love and partisan politics. And yes, they are, indeed, rhetorically opposed to deficits created by extra spending (although that did not prevent them from enacting the unfunded prescription drug benefit, under President Bush). But no, it is not deficits themselves that worry Republicans, but rather how they are caused: deficits caused by tax cuts are fine; but spending increases brought in by Democrats are diabolical, unless on the military.

Indeed, this is precisely what Jon Kyl (Arizona), a senior Republican senator, has just said:

“[Y]ou should never raise taxes in order to cut taxes. Surely Congress has the authority, and it would be right to — if we decide we want to cut taxes to spur the economy, not to have to raise taxes in order to offset those costs. You do need to offset the cost of increased spending, and that’s what Republicans object to. But you should never have to offset the cost of a deliberate decision to reduce tax rates on Americans”

What conclusions should outsiders draw about the likely future of US fiscal policy?

First, if Republicans win the mid-terms in November, as seems likely, they are surely going to come up with huge tax cut proposals (probably well beyond extending the already unaffordable Bush-era tax cuts).

Second, the White House will probably veto these cuts, making itself even more politically unpopular.

Third, some additional fiscal stimulus is, in fact, what the US needs, in the short term, even though across-the-board tax cuts are an extremely inefficient way of providing it.

Fourth, the Republican proposals would not, alas, be short term, but dangerously long term, in their impact.

Finally, with one party indifferent to deficits, provided they are brought about by tax cuts, and the other party relatively fiscally responsible (well, everything is relative, after all), but opposed to spending cuts on core programmes, US fiscal policy is paralysed. I may think the policies of the UK government dangerously austere, but at least it can act.

This is extraordinarily dangerous. The danger does not arise from the fiscal deficits of today, but the attitudes to fiscal policy, over the long run, of one of the two main parties. Those radical conservatives (a small minority, I hope) who want to destroy the credit of the US federal government may succeed. If so, that would be the end of the US era of global dominance. The destruction of fiscal credibility could be the outcome of the policies of the party that considers itself the most patriotic.

In sum, a great deal of trouble lies ahead, for the US and the world.

It’s time for all of this to end.