Thursday, November 18, 2010

Budget Puzzle

Budget Puzzle: You Fix the Budget
Today, you’re in charge of the nation’s finances. Some of your options have more short-term savings and some have more long-term savings. When you have closed the budget gaps for both 2015 and 2030, you are done. Make your own plan, then share it online:


Here's my solution:


Why We Should Beware Budget-Deficit Mania
We’re in for another round of budget-deficit mania.

The first draft of the President’s deficit commission, written by its co-chairmen Erskine Bowles and Alan Simpson, is a pastiche of ideas – some good, some dumb, some intriguing, some wacky. The only unifying principle behind their effort seems to be to throw enough at the wall that something’s bound to stick.

At their best, presidential commissions focus the public’s attention — not only on the right solution to some important problem but also on the right problem. Sadly, this preliminary report does neither.

As to solution, the report mentions but doesn’t emphasize the biggest driver of future deficits – the relentless rise in health-care costs coupled with the pending corrosion of 77 million boomer bodies. This is 70 percent of the problem, but it gets about 3 percent of the space in the draft.

The report suffers a more fundamental error — the unquestioned assumption that America’s biggest economic challenge is to reduce the federal budget deficit.

The size of the budget deficit (and cumulative debt) is meaningless without reference to the size of the economy. What looks like a big debt 10 or 20 years from now may turn out to be small if growth has been rapid in the intervening years. By the same token, a seemingly small future debt can become unmanageable if the economy tanks, or barely grows at all.

In 1945, the nation’s debt was 120 percent of GDP. That proved to be no problem in later years, not because the debt shrank but because the U.S. economy soared.

Our biggest problem isn’t the size of pending federal budget deficits or debt but an anemic recovery that may drag on for years. And unless we’re careful, budget-deficit mania may further slow economic growth – thereby making future debts even less manageable.

If Congress and the President started right now to cut the federal deficit – slashing spending and raising taxes on the middle class – our anemic economy would quickly become comatose.

That’s because consumers still aren’t spending much. They’re overburdened by personal debt and don’t qualify for new bank loans. And absent enough consumers, businesses still aren’t spending on new factories, equipment, additional hiring. Instead, they’re expanding capacity abroad, buying back their own shares of stock, and gobbling up other companies. Exports can’t possibly make up the slack.

That leaves government. Until we get out of the gravitational pull of the Great Recession, government is the only remaining booster rocket. If anything, we need more government spending and lower taxes on the middle class. This means bigger deficits, at least for the time being.

Even worse, budget-deficit mania will slow future growth if it forces government to cut the things that fuel growth – education, basic R&D, child health, improved infrastructure.

No smart family would choose to balance the family budget over borrowing money to send the kids to college. The same logic holds for the nation as a whole. If certain government spending generates higher future productivity, we’d be nuts not to make the investment just to avoid a larger deficit.

Public investments like these are becoming ever more important to our future well being because private investment is more footloose globally. Giant American-based companies are now making more money abroad – and investing more there — than in the U.S. How do we get global capital to create good jobs in America? By having the skills and infrastructure to attract it.

Yet the deficit maniacs often want to slash spending across the board, including such key investments. And they often want to eliminate tax breaks that encourage these investments. (The Bowles-Simpson report is guilty of this.)

Don’t get me wrong. America’s projected budget deficits require attention. But in addressing them we need to focus on the right solutions, and make sure we’re solving the right problem.

The preliminary report of the President’s deficit commission doesn’t help. It’s another example of budget-deficit mania generating more heat than light.


What Voters Really Care, and Don't Care, About
Thursday 18 November 2010
by: Paul Krugman, Krugman & Co. | Op-Ed

I stopped watching the Nov. 3 postelection press conference after President Obama declared that Americans rejected Democrats at the polls in part because “we were in such a hurry to get things done that we didn’t change how things got done.”

Nobody cares about this stuff — voters only care about results. Nobody really cares about earmarks, which is just political code for spending less (less on somebody else).

They don’t care about civility and bipartisanship, which in practice are code for Democrats’ giving in to Republican demands.

Nobody cares about congressional maneuvers — some pundits may argue about the role health-care reform played in the midterm elections, but I bet not one American voter in 50 knows or cares that it was passed using a filibuster-preventing reconciliation measure. So were the sacred 2003 tax cuts approved during President George W. Bush’s administration that we are told must, absolutely must, be retained. If Mr. Obama had used some fancy footwork and held 2 a.m. sessions in order to pass a big public-works program in the United States, and this program had brought unemployment rates down, Republicans would be screaming about the process, but Democrats would have comfortably held control of Congress.

And nobody cares about the national deficit, either. People sometimes say they do, but it almost always turns out that they really mean something else. Look at all the fiscal hawks who suddenly lose all interest in balancing the budget when tax cuts are on the line.

One clear result of the elections is that there won’t be a further round of stimulus spending.

And this, in turn, means that the narrative of the Very Serious People will now be: that sort of fiscal policy was tried, it failed, and that’s that.

But the facts don’t at all support the conventional wisdom.

You often hear the United States’s experience compared to that of Germany, for example. According to the widely accepted narrative, the United States went for Keynesian policies, while Germany chose austerity — and Germany did better.

Germany has not, in fact, done better in terms of gross domestic product. Just look at the chart. It is true that Germany did do better on employment, but this is due to policies that American conservatives surely don’t support, including employment subsidies, strong unions and rules making it difficult to fire workers.

This may be even more surprising: Look at the chart that shows actual government purchases of goods and services, as opposed to transfer payments (many of them just transfer payments from the federal government to states).

You will find that Germany was actually more Keynesian than the United States. (Just to be clear, I am not saying that the Germans were big Keynesians; the point is that neither nation was.)

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So it’s truly an amazing achievement: President Obama and company managed to convince voters that big government failed without actually delivering big government.

Backstory: United States Turns Right

After the Nov. 2 midterm elections were over, the United States Senate remained in Democrats’ hands — just barely, with Democrats holding 53 of 100 seats. The Republicans, however, took control of the House of Representatives with a strong majority, and since most of these victories were based on anti-deficit, anti-stimulus campaigns, a shift in direction is likely for the nation.

Immediately after the votes were counted, Republicans vowed that once they take office in January, they will challenge Democrat-led initiatives. At the top of the list is dismantling President Barack Obama’s health-care reform bill, which was passed in March and is expected to cost the government about $938 billion over a decade. Mitch McConnell, the Republican minority leader in the Senate, has proposed immediate repeal of the bill, urging the House to deny its funding and the Senate to eschew some of its provisions. Shortly after the election, Representative John A. Boehner, the next speaker of the House, called the bill a “monstrosity,” that “will kill jobs in America, ruin the best health-care system in the world and bankrupt our country.”

The newly empowered Republicans also pledged to slash spending for domestic programs immediately, by about $100 billion within a year.

While debates on health care and spending cuts could lead to stalemates, one argument that will likely go the Republicans’ way is an extension of tax cuts for the wealthy, which are due to expire at the end of the year. Mr. Obama opposes extending them for the wealthiest American taxpayers.

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Paul Krugman joined The New York Times in 1999 as a columnist on the Op-Ed page and continues as a professor of economics and international affairs at Princeton University. He was awarded the Nobel in economic science in 2008.

Mr Krugman is the author or editor of 20 books and more than 200 papers in professional journals and edited volumes, including "The Return of Depression Economics" (2008) and "The Conscience of a Liberal" (2007).

Copyright 2010 The New York Times Company.

All republished content that appears on Truthout has been obtained by permission or license.

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