This post is an attempt to take a ‘look back’ and summarize the basic economic debate we’re having today in American and in Europe too, for that matter.

One side is alarmed at the size of governments deficits and, as a result, also alarmed at the growing debt that is being accumulated.    Their preferred corrective is to cut government spending and thus deficits and debt.  If that is not done as soon as possible, then nations with high deficits and debt are in danger of experiencing high interest rates and high inflation rates.  Under that scenario nations might not be able to shoulder their financial obligations and could renege on their obligations with catastrophic results.  This side also argues that without some short term pain, in the long run the pain will be far more severe.   That’s pretty much the basic argument being made by this side.

The other side  argues that a great and severe recession is the cause of the current deficits, and the long term threat of debt is being created primarily by  out of control increases in health care spending, both in the public and the private sector.  That side prefers to attack both problems by spurring economic growth and incomes, which ends the recession and thus decreases or eliminates the current deficits, while at the same time, reforming health care systems in an effort to attack the long term debt issue that is being created by out of control health care spending increases.  That’s pretty much the other side.

So the common ground is that deficits and debt must be decreased.  The dispute is over how best to accomplish this common goal.

So far a major stumbling block is that one side wants to concentrate primarily on government spending cuts and is reluctant to increase taxes and revenue.  The other side wants to rely on both tax increases and spending cuts.  At this particular moment the spending cuts only side has accepted modest tax increases and now wants to do more government spending cuts.   The revenue increasing side claims it has already accepted large cuts.  Neither side is happy with the size of each other’s concessions.

With this concentration on cuts and revenue, the basic idea of improving the economy (a goal both sides say they want) is sort of an orphan and neither side has made much in the way of concession to the other.   The cut side has maintained throughout that tax cuts are the best way to improve economic performance.  The revenue side points out that tax cuts haven’t historically correlated to having this effect, and anyway, tax cuts increase deficits without offsetting spending cuts.

In terms of this argument, neither side has had enough of a political victory to implement their preferred policies.   The revenue side has managed to get some increased, short term spending, but that’s it.  The cut side has managed to get some spending reductions (about $2.4 trillion over 10 years) but not the size in spending cuts it wants.  The end result economically is a muddle and, so far, while there’s been some improvement in economic performance  it is considered weak and vulnerable to any further economic headwinds.

This is pretty much a summary of the debate in the US.   The question is which side’s preferred methods might work best if they could be applied forcefully:  Big cuts, or Big job increases?  Some clues are coming out of Europe, which faces similar concerns over deficits and debt.  There are important differences between European economies, governments, and policies compared to those in the US.  One cannot ignore these differences in any honest analysis.   But the concerns are the same.  What are the differences?  One, Europe is many countries that share one currency.  Unlike the US there is no European central bank which can easily enforce and coordinate currency and monetary policies; Two, each country has its own sovereign government and its own unique political structure, which also impedes coordinated fiscal policies too.

In Europe the cuts people won the day politically early on.  They demanded so-called ‘austerity’ level spending cuts on some members whose economies were suffering the most, even if their fiscal policies were relatively conservative (lower debt levels, no deficits) when the recession showed up.  This hasn’t worked very well, as a practical matter.  Those countries who’s economies seemed healthy before the recession (Ireland, Spain, Italy being the foremost examples)  have seen their economies worsen substantially, showing unemployment rates not seen since the Great Depression.   Even Great Britain, which is essentially a European economic engine but has its own currency, has suffered from austerity policy application and now hovers on a ‘double dip’ recession.   As a result, the EU governing bodies have lightened up on monetary policies and, as was done in the US, is providing backstop guarantees, and liquidity facilities,  to the most troubled EU countries.  That’s helped, particularly in regards to the interest rates being charged the most troubled countries.  Unemployment, however, remains very stubborn.

And that’s pretty much where everything stands.  Neither side has marshaled enough political power to translate their viewpoints into strong policies.  In the US, for example, infrastructure or other direct hiring such as direct money transfers to cash strapped states (something the EU cannot do) are not being done, and that’s a key component of the revenue side’s policies.   For the cost cutters, major benefit and spending cuts in social safety net spending like Social Security, Medicare and Medicaid are extremely unpopular.  Outside of Obamacare, which implements $716 billion in cost savings and implements a 3.8% tax hike to help match revenues with bills, nothing has been accomplished in an area both sides agree is otherwise going to be a major driver in national debt (private and public).

Beezer here.  So it goes, back and forth and extremely divisive at the political level.  That said, public opinion has been and continues to be in favor of job creation over almost anything else.  That would seem to politically favor the revenue side whose policies heavily favor government spending on creating jobs via infrastructure spending, or in direct money transfers to states.

Tomorrow’s vote is first about an immediate threat to our democracy.  This threat comes primarily from the domination of large, mostly multi-national, corporations who wish to lock in their dominance by using government to limit competition.  The US Supreme Court’s Citizens United decision accelerated this effort because it unleashed a flood of corporate cash, much of it provided in secret, into our political campaign system.

This multi-billion dollar effort is causing another, longer term problem:  We as a nation are not addressing our real needs and this means we are innocently taking massive and unnecessary risks.   What are those risks?

•  We are running larger deficits and debt than is necessary.  Yet we are being pandered to, again, with more tax cuts that are guaranteed to further increase deficits and debt.
•  We are much too dependent on fossil fuel energy.  Billions of people are climbing out of poverty worldwide and demanding a larger share of fossil fuel energy, which guarantees the price of these fuels will climb.  Yet we have no national program to install sustainable, clean energy systems which would insulate our country from the increasing cost of fossil fuels.   Importantly, this dependence threatens our national security as we are in danger of being in continual wars overseas protecting our fossil fuel sources.
• We are over using chemicals and hormones in our food industry.  This is not only degrading our environment but is also creating an epidemic of ill health outcomes, like diabetes, that are taxing our health care system and costing us hundreds of billions of dollars in unnecessary spending annually.
• Our weather is very likely to become increasingly more severe due to global warming.  Yet we have not begun national programs, such as those for sustainable energy or more robust infrastructures, to prepare for dealing with these probable weather challenges.
• Our financial system is lopsided, favoring very large banking conglomerates that are shielded from competition and the dangers of their risk taking.    We have, so far, continued to socialize their losses which has removed their caution to risk taking.
• Our tax structure too much favors the incomes of the wealthy over the incomes of a majority of Americans.  Privileged rates are applied to wealthy incomes from dividends, capital gains and carried interest.  The tax laws are shot full of tax avoidance schemes designed for the wealthy like unified charitable trusts, irrevocable trusts, offshore accounts and trusts and estate taxes that avoid capital gains taxes altogether.   Combined with broad based tax cuts, these schemes guarantee high deficits and debt and the underfunding of necessary government programs like social security, medicare and medicaid.
• Our regulatory structures are too weak.  From bank risk taking, to environmental abuse, to a medical system focused on the more profitable business of treating symptoms rather than creating cures, regulators all too often look the other way or become enablers of corporations only concerned with the most profitable activity irrespective of the activity’s bad outcomes for individuals and the nation.

Beezer here.  Unfortunately one of our two political parties, the Republican party, is ‘all in’ supporting the efforts of multi-nationals.  They enable all these bad outcomes.  They support unlimited corporate campaign spending that dominates our national discussions and hides the real risks we are taking.  They favor a tax system tilted heavily in favor wealthy incomes, which in turn aggravates income inequality and suppresses both job creation and income gains for the majority of working Americans.   They pander to our want of lower taxes while endangering our needs for a safer, healthier and more competitive economy.   This is the precipice we face in tomorrow’s national elections.  If Republicans win tomorrow, then our needs will never be addressed without encountering some massive disaster of epic scale.  It’s that important.  We need to regain our ability to self-govern. 

New York Times columnist Frank Bruni has a piece in the New York Times describing our political penchant for last minute brinkmanship.

“Taxmageddon,” as it’s sometimes called on Capitol Hill, is the new biggie, looming early next year. That’s when, in the absence of Congressional action, supposedly temporary tax cuts passed under George W. Bush and extended by President Obama expire as automatic spending reductions agreed to at the end of the debt ceiling showdown (“debtmaggedon”) begin to kick in. The combined force of those developments, according to some projections, would be a $700 billion blow to the economy in 2013 and, as the year progressed, a recession….

Not to point out the obvious, but the $700 billion doesn’t disappear if these ‘temporary’ tax cuts are not extended and the budget cuts implemented.  Rather, some of the increased revenue goes to the government (estimates from the Tax Foundation run from a low of $100 billion to a high of $250 billion increase annually), and the spending cuts end up reducing deficits and debt. The problem there is what that transferred $700 billion is spent on.  Do we pay down deficits and/or debt?  Do we begin massive hiring on infrastructure projects?  Do we split the difference between these two very different uses?

If Congress does extend the tax cuts, where does that $700 billion go in the private sector?  The presumption is, depending upon your income, some of it goes to consumption, some of it goes to whittle down debt, and the remainder basically goes into some form of savings.  But these are assumptions.  The fact is no one can predict where that $700 billion in ‘temporary’ tax cuts really goes and in what proportion.

The two government options, paying down deficits and or debt, or hiring millions of people doing infrastructure projects, are predictable.  Applying the $700 billion against public debt is easy enough to figure out.  It’s simple math, only complicated by the interest rates applied to the debt that’s retired.   The downside to this option is that the benefits of lowering debt, accrue over time in the form of less interest that needs paying.  If the $700 billion retires $700 billion in debt that carries a 4% interest rate, then the annual savings is $28 billion.  If it’s applied directly to deficits, then the benefit accrues more quickly in the form of dramatically reducing the deficit.

The second option, infrastructure projects, is even more straightforward.  Estimates on these projects range from 10,000 jobs per billion to as much as 18,000 jobs per billion.   Research by the University of Massachusetts Public Economy Research Institute estimates $148 billion in infrastructure work would create as many as 2.6 million jobs.   That would drop the unemployment rate down to 5.6%.

These jobs don’t appear instantly, of course, but they do have legs.  These types of projects can run for three or more years.   And the net economic benefits can last for decades.

Beezer here.  The upside is greater than the downside, in our opinion.  Predictions of a double dip can’t be ignored, but any recession is guaranteed to be fairly brief simply because of the employment that would be created.   Splitting the difference two ways with some of the tax cuts extended but not all, and the resulting  revenue increase dedicated to infrastructure and its employment, would be the most effective course.  Our dysfunctional Congress, particularly the Tea Party members in the House, are determined to defund almost all  government spending and that means no tax increases.  Period.   They have single mindedly pushed the nation to the so-called ‘fiscal cliff’ at every opportunity.  Democrats should say the nation is going to build a bridge over the fiscal cliff. 

New York Times journalist Annie Lowry reports, in a Sunday article:

In 2009 and 2010, total nationwide health care spending grew less than 4 percent per year, the slowest annual pace in more than five decades, according to the latest numbers from the Centers for Medicaid and Medicare Services…..

A recession has caused part of the slowdown, but health care experts and economist’s say the slowdown is greater than the recession impact.

Still, the slowdown was sharper than health economists expected, and a broad, bipartisan range of academics, hospital administrators and policy experts has started to wonder if what had seemed impossible might be happening — if doctors and patients have begun to change their behavior in ways that bend the so-called cost curve….

“The tectonic plates might be beginning to shift,” said Karen Davis, the president of the Commonwealth Fund, a nonprofit research group in New York. “It’s hard to believe everything that’s been tried over the last decade to slow spending wouldn’t be making a difference.”

Experts were surprised, for instance, at a drop in spending on some hospitalized seniors — people enrolled in Medicare, whose coverage the recession should not affect. They also noted that some of the states where health care spending slowed most rapidly were states that were not hit particularly badly by the recession, suggesting that other factors were at play.

“The recession just doesn’t account for the numbers we’re seeing,” said David Cutler, a Harvard health economist and former adviser to President Obama. “I think there’s much more going on.”

The implications of a bend in the cost curve would be enormous. Policy makers on both sides of the aisle see rising health care costs as the central threat to household budgets and the country’s fiscal health. If the growth in Medicare were to come down to a rate of only 1 percentage point a year faster than the economy’s growth, the projected long-term deficit would fall by more than one-third.

The loss of private insurance has been going on for almost two decades.  It’s not a phenomenon unique to any particular administration.  As insurance rates rose quickly, employers reduced benefits and increased employee co-pays, which has an effect on health care use.  But still health care costs rose smartly.  Maybe it’s hitting some type of wall, some sort of limit as to what health care can charge for services.  Maybe employers, hospitals and employees are beginning to push back on the fee for service type of care.

“In Massachusetts, we had a lot of political pressure to understand the growth in costs as unsustainable,” said Sandra Fenwick, the chief operating officer of Children’s Hospital Boston, which has put more than 100 reforms into effect, saving millions of dollars, in the past four years. “We had to figure out how we were going to be part of the solution, not part of the problem.”

Ms. Davis of the Commonwealth Fund said that “a lot of the big gains have come from keeping people out of the hospital and the emergency rooms.”

“Five or seven years ago, the private sector started rewarding providers that got their patients’ chronic conditions like diabetes and asthma under control,” Ms. Davis said. “That was couched as a quality-control measure, or putting an emphasis on chronic-disease care. But the direct result is going to be a reduction of hospitalization.”

Moreover, experts said not to discount the accountable-care revolution just because it remained small or because the changes implemented by the Obama health care law had not come into full effect yet.

“In the past, these slowdowns have occurred not just because of the direct effect of reforms, but because of greater attention to reforms changing provider and patient behavior,” said Mark B. McClellan, the economist and doctor who ran Medicare and Medicaid under President George W. Bush.

Beezer here.  Oh well, it would be nice if this moderation, or flattening out, of health care cost increases continues.  Nobody knows if it will.  That’s the problem with projecting trends out into decades, they’re almost always significantly off.  If they do continue, then a lot of pressure on longterm debt is lifted because all those debt projections assume the past rates of growth in health care costs.

New York Times columnist and Princeton economics professor, Paul Krugman, has produced four charts even a simpleton can understand that explain our current deficits and why these deficits do not constitute stimulus.

Here’s an exercise I did for my own edification — and to prepare for questions on book tour — but others may be interested in the results. I wanted a simple answer to the people who always insist that we must be having massive fiscal stimulus because we have a big budget deficit; my answer is that the deficit is a result of the depressed economy, but how do we show that without getting too much into the weeds?

Well, here’s a quick and dirty approach. Suppose that spending and revenues would, in the absence of the slump, have risen at 5 percent per year — roughly GDP growth plus inflation, and actually a bit slower than actual spending growth (6 percent per year) from 2000 to 2007. With this assumption, I can draw three charts for the federal government (using CBO data) and one for state and local (using FRED) that, I think, tell the story.

 

First, most of the surge in the federal deficit is about plunging revenue. In the figure below, the “No recession” line shows what would have happened if federal revenue had grown 5 percent per year after 2007:

That’s about an $800 billion per year shortfall.

What about spending? Well, it is higher than you would have expected in the absence of the slump, by around $300 billion:

What’s that $300 billion about? Well, they’re mainly about the category CBO calls “income security”, mainly food stamps and unemployment insurance:

Income security spending is, of course, strongly related to the state of the economy. So are some other forms of spending — Medicaid, of course, but also things like disability insurance, where people on the cusp are more likely to seek the benefits if they can’t find work.

So basically, the federal deficit is all, yes all, about the recession and aftermath.

And meanwhile, there has been austerity at the state and local level (calendar years here instead of fiscal, but that’s not crucial):

So the reality is that we have deficits because the economy is depressed, but relative to previous policy we’ve been imposing fiscal austerity, not stimulus.

From an article by Reuters columnist Felix Salmon.

This is a chart of corporate income tax as a percentage of total corporate profits, and it’s the main thing you should bear in mind when people start saying that the US corporate income tax is too high. And while you’re at it, you should remember this chart, too, showing corporate income tax as a percentage of GDP.

Once upon a time, the corporate income tax generated a significant share of tax revenues; now, it’s bumping along in the 2%-of-GDP range. Yes, the marginal rate of corporate income tax is high, at 35%. But US companies are extremely good at not paying that.

But at least we know the aggregate amount that corporations pay in taxes. What we don’t know — because they won’t say, and no one’s forcing them to say — is how much any given public company pays.

Allan Sloan has a very good column on this today. Companies already report 16 different tax metrics; they should simply be required to add a 17th — the amount they pay the IRS in taxes — which in many ways is most important. The companies already file tax returns; the number’s right there, on lines 31 and 32. They just refuse to say what it is.

Beezer here.  Some companies probably do pay the 35% top tax rate.  That many do not come even close is unfair to those that do.  This is just another piece of evidence that tax lobbyists have made a mash of our tax system, making it deeply unfair not only to other taxpayers but to the country at large.  It’s no doubt a major reason why we manage to run deficits while wage earners complain about tax levels, particularly when local taxes are counted:  The system is being thoroughly gamed.