In another example of how badly Congress is out of touch and mis-informed, Social Security is on the table for cuts by the budget chickenhawks.

Are they going to cut our bloated and wasteful military budget?  Hardly.  Are they going to clean up our convoluted and unfair tax system?  Not very likely.  Are they going to end lopsided and misguided corn subsidies?  Slim and none are the chances there.  How about the employer tax breaks on health care?  Yeah, right.  Or the home interest deduction?  Of course not.

Nope, they’re going to cut SS benefits, or withold them altogether until you’re older. 

From Felix Salmon over at the Washington Post:

“ Lurking beneath this conversation is an unquestioned assumption: We live longer, so we should work longer. That’s pretty intuitive to members of Congress, who seem to like their jobs and don’t seem to like the idea of retiring. It’s also pretty intuitive to blogger/columnists, who spend their time in air-conditioned rooms opining about pension programs. But most people don’t work in Congress or in the media. They work on their feet. They strain their backs. They’re bored silly at the end of the day. By the time they’re in their 60s, they want to retire.

You see that reflected in Social Security. Age 66 is when you get full benefits. But most people begin taking Social Security at age 62. They get less, but they can retire earlier. To them, the trade-off is worth it. And remember, the country is much richer than it was in 1935. Adjusting for inflation, our gross domestic product in 1935 was $865 billion. In 2009, it was more than $12 trillion. We have more than enough money to buy ourselves some leisure time at the end of our lives. At least if that’s one of our priorities.”

So how expensive would it be to ‘fix’ SS and maintain the current age benchmarks?  Again, from Salmon.

“As Stephen C. Goss, the system’s chief actuary, has written, Social Security projects an imbalance “because birth rates dropped from three to two children per woman.” That means there are relatively fewer young people paying for the old people. “Importantly,” Goss continues, “this shortfall is basically stable after 2035.” In other words, we only have to fix Social Security once.

The size of that fix is significant, but not astonishing. Over the next 75 years, the shortfall will be equal to about 0.7 percent of gross domestic product. How much is 0.7 percent of GDP? To put that in perspective, the Center on Budget and Policy Priorities calculates that it’s about as much as George W. Bush’s tax cuts for the rich will cost over the same period. Saying we can afford those cuts — which is the consensus Republican position — but not Social Security’s outlay is nonsensical. Coming up with 0.7 percent of GDP isn’t a crisis. It’s a question of priorities.”

Keeping tax breaks/cuts for the wealthy is a priority?  It is for Republicans, apparently.  But it sure isn’t for most Americans.  Again from Salmon.

“An August survey from Greenberg Quinlan Rosner Research tested reactions to a variety of Social Security fixes. One of the options was raising the retirement age to 70. Two-thirds of respondents opposed it. Another option was eliminating the cap on payroll taxes so that well-off workers pay the tax on their full income, just as middle-income workers do now. A solid 61 percent supported it.”

Beezer again.  Democrats should make hay about this.  SS not only provides some badly needed retirement income, it also provides disability insurance and survivor’s benefits.  And with private employers withdrawing from defined benefit plans, SS is a major chunk of retirement funds for more and more workers.

The real difference between Democrats and Republicans isn’t about how much the government spends, it’s about where the government spends.  Democrat priorities are aimed at labor and the middle class.  Republicans cater to the wealthy class.   Democrats should remind voters of this most important distinction.

Once again, thanks to economist’s view for highlighting Salmon’s column.

I have a deep suspicion that the Republicans know that the public doesn’t understand the national budget.  And knowing that, they can tell the public things that they (the Republicans) absolutely know to be false.

This from a comment to a New York Times blog post by economist Paul Krugman.

“This says that the domestic balance, the government balance, and the external balance must sum to zero. If the external balance is constant, then a domestic surplus must be offset by an equal government deficit, and vice versa. Both the government and private sector cannot be in surplus if the trade balance doesn’t accommodate. No one realistically expects the US trade balance to do this, at least anytime soon.

Therefore if the private sector desires to rebuild balance sheets by saving and delevering, then the government must run a deficit that accommodates this desire, or nominal aggregate demand will sag further, risking deflation and depression. The government can run a deficit with either increased expenditure or decreased taxation, or a combination thereof in order to address this. Monetary policy cannot directly affect nominal aggregate demand, as the past year goes to show. Fiscal policy can.

The immediate problem is lagging demand, which created an output gap that is resulting in historically high unemployment. Government deficits must address this in a timely way, since the foregone opportunity of an output gap and the degradation of human resources due to high unemployment and underemployment are very costly. Therefore the multiplier associated with the various forms of stimulus must be considered. The multiplier associated with tax cuts is low, while the multiplier associated with expenditure is much higher. So while a payroll tax holiday would help the middle class rebuild balance sheets, what is needed more is expenditure aimed at bolstering demand. This could be accomplished with per capita block grants to states and amplification of the automatic stabilizers. Worrying about increasing deficits will just be more costly in the end.”

Beezer here.  I would add infrastructure projects as a first priority in spending.  They do create jobs and resulting demand, but they also create public goods that are necessary for developed economies.

Irrespective of who you blame for creating the Great Financial Recession that is now into its third year, the underlying reality is the private market stopped creating jobs and instead went about ruthlessly destroying them.  More than 8 million of them so far, and any return to weakness will force the private sector to accelerate job destruction once again.

Three years ago the economy started a big shrink.  Demand plummeted as individuals, small businesses and large businesses pulled back their spending.  A positive feedback loop formed as declining demand spurred increased job destruction which, in turn, fed back into and added to  declining demand.

The federal government spent almost $800 billion to shore up failed bank balance sheets.  It spent another $787 billion for a three-year stimulus package that included tax cuts, infrastructure spending and other spending to support the automobile industry and so-called ‘green’ industries aimed at reducing the country’s debilitating dependence on foreign produced petroleum.  And the Federal Reserve stepped in to buy more than a trillion dollars in private assets, further reducing the pressure on bank, non financial corporation and individual balance sheets.

The Congressional Budget Office (CBO) estimates that the counter-cyclical stimulus package, by itself, created about 3 million more jobs than there would be without the effort.  Without it unemployment would be 11.5% as of this writing, instead of 9.6%.   Because there is another 36% of the package yet to take effect, another 500,000 jobs are yet to be created. 

The most effective part of the stimulus package is that spent on building new, or improving upon existing public infrastructure.   The Political Economy Research Institute of the University of Massachusetts estimates infrastructure spending creates 18,000 jobs per billion dollars invested, compared to 14,000 jobs created by tax cuts.

And it’s not as though there’s any mystery about how much infrastructure spending needs to be done.  The American Society of Civil Engineers estimates there are $2.2 trillion in already identified public works maintenance/improvement projects.

Consider the New England region.  From PERI:  

“In this new study, PERI Research Professor Jeffrey Thompson presents compelling evidence that investing in state infrastructure and building the skills of the current and future workforce are among the most effective ways to create jobs in New England.

Prioritizing Approaches to Economic Development in New England provides ample evidence that infrastructure (roads, bridges, dams, energy transmission systems, drinking water, and the like) and education are effective approaches for creating jobs and generating economic growth. By necessity, infrastructure repairs employ local workers and use local materials. These activities would also meet an increasingly urgent need: evidence reviewed by Thompson shows that 40% of bridges in the region are structurally deficient; 80% of the region’s dams present significant hazard; most of our roads are in poor or mediocre condition; and our drinking water infrastructure is in need of $12 billion worth of repairs and renovations.

Thompson describes how, instead of making these investments, state policymakers are too often turning to corporate tax breaks to lure businesses to their state and public subsidies for employers who promise to hire workers in the state. These policies have been tried for decades, but Thompson presents the clear evidence that these tax subsidies don’t work to create jobs or revitalize state economies.”

It’s why economics professor Laura Tyson, a member of President Obama’s Economic Recovery Council, wrote in a recent New York Times op-ed article:

“Over the next five years, the federal government should work with state and local governments and the private sector to finance $1 trillion worth of additional investment in infrastructure. It should extend the Build America Bonds stimulus program, which in the past year has helped states finance $120 billion in infrastructure improvement.”

The work needs to be done.  It creates more jobs than do tax cuts.  And it helps maintain economic activity that is counter-cyclical to the negative effects of the poor demand/job destruction cycle now in full swing.

So why aren’t we already doing this?  Why aren’t we doing what creates jobs best in the current environment?  And why aren’t we doing what we have to do anyway:  Maintain the necessary infrastructure for a modern, developed economy?

Because the Republican Party doesn’t want to do it.  If it is done and jobs are created, the recession wouldn’t be as bad.  It might even look like things are improving.  And that’s not good for the Republican Party.   Republicans want back in power, particularly in the House of Representatives where spending is authorized.  If the public is miserable then the party in power, the Democrats, will be blamed.

If the public suffering is what it takes to regain power, the Republican Party is more than willing to let the suffering go unabated.  In direct contradiction of their claims of fiscal responsibility, Republicans aren’t even willing to let the Bush tax cuts expire as scheduled.  These are tax cuts that reduce government revenue by more than $600 billion annually, further aggravating government deficits and hobbling the government’s responsibility to maintain critical public infrastructure.

President Obama must take these facts, and their consequences, directly to the court of public opinion.  The Republican positions are built like a house of cards.  Any whiff of common sense, pro-active opposition would expose the entire charade.  And it wouldn’t take long because absolutely nothing in the Republican Party rational stands up to real world facts.

Tax cuts are relatively ineffective, compared to actual projects like those on infrastructure, in creating jobs–the economy’s number one need right now.  The private economy is barely holding jobs right now, and has destroyed 8 million jobs the past three years.  To say this part of the economy is going to suddenly start creating new jobs, as Republicans apparently believe, is total nonsense.  Even the public, especially the public working in the private sector, knows this isn’t going to happen any time soon.  It doesn’t even pass the ‘smell’ test at the local level.

The country needs jobs now.  It needs demand now.  Jobs create demand.  The government can create the jobs now.  The private market cannot create jobs now.

The problem is obvious.  So is the cure.  President Obama should take this case to the public now.  They will recognize its value and vote that way in November.

A new briefing paper by the Economic Policy Institute (EPI) documents that median incomes haven’t gone anywhere for quite some time.  Yet productivity has steadily increased.  Economic models say median incomes should increase along with productivity.  But they didn’t.

“From 2002 until 2007, productivity increased 11%, but the hourly compensation of the typical high school and college graduate worker actually fell.  In other words, the disconnect between pay and productivity in the years leading up to the current downturn encompassed a broad swath of the workforce, with neither the median high school graduate nor the median college graduate capturing the benefit of the economy’s productivity growth.”

Beezer here.  And keep in mind this chart ends in 2007.  Since then the trend has escalated because productivity has gone up during this recession, even as median income drops further due to massive layoffs.

Current thinking about this phenomenon, this disconnect between median labor wages and productivity growth, has brought the Great Depression back into the spotlight because it was preceeded by the same phenomenon.  Most modern economists, though not all, tend to blame poor monetary policy by the Federal Reserve as a major cause of the Great Depression.  Because they didn’t understand the effects of deflation, they didn’t realize that even lower interest rates were, in fact, too high in real terms.  Fortunately the Fed today has the benefit of studying the Great Depression, so they didn’t make that mistake.

But maybe that wasn’t the real problem.  Maybe the real problem is somehow connected to this wage/productivity disconnect.  Maybe it wasn’t just a coincidence.  Maybe the disconnect was a major cause of the Great Depression.  And if so, then it might also be a major cause of the current financial induced recession too.

Rutgers History PhD James Livingston may be on to something in this article published by the History  News Network.

“Look first at the new trends of the 1920s.  This was the first decade in which the new consumer durables—autos, radios, refrigerators, etc.—became the driving force of economic growth as such.  This was the first decade in which a measurable decline of net investment coincided with spectacular increases in nonfarm labor productivity and industrial output (roughly 60% for both).  This was the first decade in which a relative decline of trade unions gave capital the leverage it needed to enlarge its share of revenue and national income at the expense of labor. 

These three trends were the key ingredients in a recipe for disaster.  At the very moment that higher private-sector wages and thus increased consumer expenditures became the only available means to enforce the new pattern of economic growth, income shares shifted decisively away from wages, toward profits.  At the very moment that net investment became unnecessary to enforce increased productivity and output, income shares shifted decisively away from wages, toward profits. 

What could be done with the resulting surpluses piling up in corporate coffers?  If you can increase labor productivity and industrial output without making net additions to the capital stock, what do you do with your rising profits?  In other words, if you can’t invest those profits in goods production, where do you place them in the hope of a reasonable return?

The answer is simple—you place your growing surpluses in the most promising markets, in securities listed on the stock exchange, say, or in the Florida real estate boom, particularly in view of receding returns elsewhere.  You also establish time deposits in commercial banks and start issuing paper in the call loan market that feeds speculative trading in securities.

At any rate that is what corporate CEOs outside the financial sector did between 1926 and 1929.  They had no place else to put their increased profits—they could not, and they did not, invest these profits in expanded productive capacity, because merely maintaining and replacing the existing capital stock was enough to enlarge capacity, productivity, and output.

No wonder the stock market boomed, or rather no wonder a speculative bubble developed there.  It was the single most important receptacle of the surplus capital generated by a decisive shift of income shares away from wages, toward profits—and that surplus enforced rising demand for new issues of securities even after 1926, when, according to Moody’s Investors Service, almost 80 percent of the proceeds from such IPOs were spent unproductively (that is, they were not used to invest in plant and equipment or to hire labor).

The stock market crashed in October 1929 because the non-financial firms abruptly pulled their $7 billion out of the call loan market.  They had experienced the relative decline in demand for consumer durables, particularly autos, since 1926, and knew better than the banks that the outer limit of consumer demand had already been reached.  Demand for stocks, whether new issues or old, disappeared accordingly, and the banks were left holding the proverbial bag—the bag full of “distressed assets” called securities listed on the stock exchange.  That is why they failed so spectacularly in the early 1930s—again, not because of a “credit contraction” engineered by a clueless Fed, but because the assets they were banking on and loaning against were suddenly worthless.

The financial shock of the Crash froze credit, including the novel instrument of installment credit for consumers, and thus amplified the income effects of the shift to profits that dominated the 1920s.  Consumer durables, the new driving force of economic growth as such, suffered most in the first four years after the Crash.  By 1932, demand for and output of automobiles was half of the levels of 1929; industrial output and national income were similarly halved, while unemployment reached almost 20 percent.

And yet recovery was on the way, even though increased capital investment was not—even though by 1932 non-financial corporations could borrow from Herbert Hoover’s Reconstruction Finance Corporation at almost interest-free rates.  By 1937, industrial output and national income had regained the levels of 1929, and the volume of new auto sales exceeded that of 1929.  Meanwhile, however, net investment out of profits continued to decline, so that by 1939, the capital stock per worker was lower than in 1929. 

How did this unprecedented recovery happen?  In terms of classical, neoclassical, and supply-side theory, it couldn’t have happened—in these terms, investment out of profits must lead the way to growth by creating new jobs, thus increasing consumer expenditures and causing their feedback effects on profits and future investment.  But as H. W. Arndt explained long ago, “Whereas in the past cyclical recoveries had generally been initiated by a rising demand for capital goods in response to renewed business confidence and new investment opportunities, and had only consequentially led to increased consumers’ income and demand for consumption goods, the recovery of 1933-7 seems to have been based and fed on rising demand for consumers’ goods.”

That rising demand was a result of net contributions to consumers’ expenditures out of federal deficits, and of new collective bargaining agreements, not the eradication of unemployment.  In this sense, the shift of income shares away from profits, toward wages, which permitted recovery was determined by government spending and enforced by labor movements. 

So the “underlying cause” of the Great Depression was a distribution of income that, on the one hand, choked off growth in consumer durables—the industries that were the new sources of economic growth as such—and that, on the other hand, produced the tidal wave of surplus capital which produced the stock market bubble of the late-1920s.  By the same token, recovery from this economic disaster registered, and caused, a momentous structural change by making demand for consumer durables the leading edge of growth.”

Beezer again.  Does this sound familiar?  This income wage shift occurred prior to this meltdown too.    And instead of pouring the additional profits into productive investment (at least domestically, there was investment into foreign production) the additional profits searched for somewher else to park.   And what Wall Street provided was mortgage securities.  The resultant flow of immense cash savings into the housing market was a major dynamic in play pumping up the housing bubble.

So how do you climb out of this hole?  You reverse the income shift, for one thing.  And you use government tax and other policies to make domestic capital investment more attractive than investing overseas.  This should include tariffs if necessary in order to stop or reverse the income shift that’s already occurred.  It’s not just about protecting existing jobs and creating new ones, it’s also about producing wage gains–that’s the income shift that needs to be reversed.

From President Obama’s speech on Aug. 30th.

“And there’s currently a jobs bill before Congress that would do two big things for small business owners: cut more taxes and make available more loans.  It would help them get the credit they need, and eliminate capital gains taxes on key investments so they have more incentive to invest right now.  And it would accelerate $55 billion of tax relief to encourage American businesses, small and large, to expand their investments over the next 14 months.

Unfortunately, this bill has been languishing in the Senate for months, held up by a partisan minority that won’t even allow it to go to a vote.  That makes no sense.  This bill is fully paid for.  It won’t add to the deficit.  And there is no reason to block it besides pure partisan politics. 

Small business owners and the communities that rely on them, they don’t have time for political games.  They shouldn’t have to wait any longer.  In fact, just this morning, a story showed that small businesses have put hiring and expanding on hold while waiting for the Senate to act on this bill.  Simply put: holding this bill hostage is directly detrimental to our economic growth.

So I ask Senate Republicans to drop the blockade.  I know we’re entering election season.  But the people who sent us here expect us to work together to get things done and improve this economy.”

Republicans are only about power.  Nothing else.  Their actions throughout this recession have been focused not on helping the economy recover, but just the opposite.  They don’t want economic recovery.  They want suffering, because suffering increases dissatisfaction, and dissatisfaction normally hurts the majority party.

Despite this continuous Republican blockade against economic recovery, Obama has had some victories–although the Republicans needed to be heavily bribed in order to get the bills passed.

Here’s the list of the more significant bills that have managed to go into law and are aimed at speeding recovery.

Progress

• The President signed the American Recovery and Reinvestment Act, which has been responsible for about 3 million American jobs and brought the economy back from the brink of another depression.
• The President signed Wall Street Reform, the most sweeping reforms since the Great Depression, to hold Wall Street accountable, put an end to bailouts and “too big to fail,” and enforce the strongest consumer protections in history.
• The President signed the HIRE Act providing a payroll tax credit for companies that hire employees who have been looking for work for 60 days or more.  Millions of workers have been hired through this process already.
• The President launched the National Export Initiative with a goal of doubling exports and supporting several million new jobs over five years. 
• The President announced the “Making Home Affordable” home refinancing plan.
• The President launched a $15 billion plan to boost lending to small businesses.
• President Obama played a lead role in G-20 Summit that produced a $1.1 trillion deal to combat the global financial crisis.
• The President signed the Fraud Enforcement and Recovery Act which gives the federal government more tools to investigate and prosecute fraud, from lending to the financial system, and creates a bipartisan Financial Crisis Inquiry Commission to investigate the financial practices that brought us to this point.
• The President signed the Helping Families Save Their Homes Act, expanding on the Making Home Affordable Program to help millions of Americans avoid preventable foreclosures, providing $2.2 billion to help combat homelessness , and helping to stabilize the housing market for everybody.
• The President signed the Credit Card Accountability, Responsibility, and Disclosure (CARD) Act to protect Americans from unfair and deceptive credit card practices.

Beezer here.  Not too shabby considering the Republican blockade.  Most of the original legislation had to be severely compromised in order to gain even a narrow margin of victory.  In some cases it took direct bribery of a few Republicans to gain passage.

It’s the cost of doing business with a ethically bankrupt Republican Party.

The simple fact is that Social Security won’t go broke.  So for those who may be frightened by all the talk of ‘fixing’ social security, here’s the truth.  From Bruce Webb over at the Angry Bear blog.  Of course Bruce has a big advantage over political conservatives.  He knows the math.

“A couple of further notes. If retirement benefits are projected to increase in real terms by close to 100% over the next 75 years, then a projected cut of 20-25% on Trust Fund exhaustion would STILL see those future workers with larger baskets of goods than similarly situated retirees (this is what we call ‘Rosser’s Equation’).

But this real term increase doesn’t come at the expense of younger workers still in the work force, at least not without some forced special pleading. The goal clearly shown in Fig 2 is to keep overall replacement values steady with each future generation just able to hold onto its share of the overall societal increase. This seems fair to me.

There are some that insist that if you ‘really’ look at the numbers you will see that Social Security was simply too generous to earlier generations. How you reconcile this with these graphs showing that each generation will be able to afford a bigger basket of goods than their predessessor would seem difficult. Because arguments from ROI (but I could have had EVEN MORE, and screw Grandma) seem pretty hard-hearted and selfish. But perhaps someone can make the moral case in comments.”

Beezer here.  So if even the math challenged can understand that Social Security isn’t going to go broke, what the heck is going on?  Webb has an idea.

“Nope in my opinion the fundamental motive for opposing Social Security is not driven by greed as such but instead an ideology that depends crucially on the perception that Big Government is always and everywhere a failure, and that the bigger the counter-example the higher the risk to that overall paradigm. If Social Security was just headed for the cliff, its enemies would just stand back and watch it go, arguably this is where they were at in 1993. It is only when they see the coach driver beginning to get the team under control and steer it away from the cliff that they have to jump in and try to spook the horses again.

Which is why people asking why the actions of Social Security opponents don’t seem to be particularly helpful in guiding the stage coach away from the cliff are asking the wrong question, looked at in that way their actions don’t make sense at all. On the other hand if you flip it around a lot of things become clear, there being more than one definition of ‘fixing’.”

Beezer again.  There it is, that damn ideology again.  No matter the evidence.  No matter the math.  No matter the real historical record.  Republicans have so bought into the myth that the government can do no good, only harm, that such a large success like Social Security cannot be let stand.  So spook the horses and drive the program off the cliff.  That’s the only ‘fix’ the Republicans have in mind.

Beware America.  You are being sold down the proverbial river of misplaced ideology.