President Obama today nominated former Republican Senator Chuck Hagel as his choice for Defense Secretary.  It looks like Hagel’s nomination, like just about all Obama’s nominations, faces stiff Republican opposition.  That said, what may not be appreciated is that the toughest job the next Defense Secretary faces is getting control of the US Defense budget, which is larger than the total defense spending of the next 13 nations, and swallows up 20% of our federal budget, more than is spent on Medicare.

Brad Plummer is the Washington Post’s defense specialist and he has a great article in today’s paper outlining the magnitude of the problem.

Here’s a historical chart of defense spending since World War II in inflation-adjusted dollars. There’s a big spike for the Korean and Vietnam wars. There’s another big ramp-up during the 1980s under President Reagan. Then defense spending got cut significantly during the Clinton years until soaring to historically unprecedented levels after 9/11.

U.S. defense spending is set to fall again in 2013, though it will still be as high in real terms as it was at the height of the Reagan build-up.

Two big things are about to happen to military spending. The wars in Iraq and Afghanistan are winding down. And, thanks to the 2011 Budget Control Act, the Pentagon is facing both hard budget caps and a looming sequester that would cut defense spending by about $1 trillion over the next decade (compared to what was expected).

That seems severe. Although, as the graph above from the Center for Strategic and International Studies shows, even if the sequester is fully implemented, which no one expects, the drawdowns after Korea, Vietnam and the Cold War were far more drastic in inflation-adjusted dollars.

Beezer here.  We spend 20% of the federal budget on defense, more than the combined budgets of the next 13 nations.   More than we spend on Medicare.  We could redirect, at minimum, $150 billion of the $800 billion we spend now on defense into badly needed infrastructure upgrades like a national smart energy grid.  That alone would create about 2.25 million jobs and we’d enjoy a huge productivity gain for generations, making the US far more competitive globally.  Republicans don’t want to trim defense spending, of course, exactly the opposite of what any sane government would do.  I can’t think of a better illustration of just how bonkers the GOP has become.

They’re back!  Just as they did in 2011, Republican Tea Partiers will once again oppose raising the nation’s debt ceiling, holding the nation’s economy hostage in an effort to blackmail concessions from the President and Democrats.

Nevermind that the 2011 blackmail effort cost taxpayers more than $18 billion, several hundred thousand jobs and a drop in the nation’s credit rating.   It also resulted in $1 trillion in forced spending cuts, called ‘sequestration,’ which Republicans recoiled from actually cutting when faced with a ‘fiscal cliff’ of their own making last month.

Let’s be very clear about something.  Republicans ( with the exception of its tea party members) know they have to approve the debt ceiling and have publicly admitted that failing to do so would badly damage the nation’s economy.  The Debt Ceiling is established to approve paying the bills already made by Congress.  Failing to raise the ceiling tells the rest of the world the US cannot be trusted to honor its debts.

It’s like a group of people agreed to jointly take out a home mortgage then after the mortgage was signed by all, a few unilaterally decided they didn’t want to pay their share but they still wanted to live in the house. The important point is Republicans will have made no concessions by finally approving that which must be approved.   This is not a debate over bargaining chips where Democrats want more spending and Republicans less.  Washington Post writer Greg Sargent in his regular column, The Morning Plum, explains this precisely.

“It will only constitute Republicans agreeing not to damage the whole country, which does not constitute (one hopes) them making a sacrifice.

Without these facts, it is simply impossible for readers and viewers to understand the basic situation that’s unfolding here. Indeed, you can read through much of the coverage and come away with the sense that this is a typical negotiation: Democrats want a rise in the debt ceiling; Republicans want spending cuts; therefore, the two sides are squaring off for a game of chicken to see who can extract more from the other. That’s not what’s happening at all, and any accounts that portray it as such present a deeply unbalanced picture.”

Huffington Post writer Jason Linkins calls Republicans who want to force a debt ceiling default ‘lunatics.’

“But what’s changed to make things worse is that this is no longer mere idle talk and procedural bravado — there are people in Congress who truly see default as an ideal alternative to having to concede any points in what should be a rational process of negotiation and deal-making. Rep. Michele Bachmann made her willingness to destroy the global economy for the glory of Tea Party Caucus a central selling point for her presidential candidacy.”

Even Bachmann’s lunacy couldn’t make it through the Republican primaries, but not to worry, if you can’t be constructive then be destructive appears to be the Republican Tea Party’s preferred use of power.

This is blackmail of the majority by a powerful minority which could not get its way via the ballot box.  This is not governance, it is the absence of governance.  This is the kind of malfeasance that creates uncertainty in the business world.   Look at the 300 point rally in the Dow Jones average after Republicans finally allowed limited tax increases as part of the so-called fix of the ‘fiscal cliff.’   Republican refusal to honestly come to the legislative table in order to resolve issues by majority vote, exemplified by this type of blackmail,  can only damage the economy and once again cost billions of taxpayer dollars and jobs.  If this Republican failure to honestly govern continues, then they will face another huge loss at the ballot box in 2014.  The American voter has great patience and allows Congress great leeway, but if this type of intransigence continues that patience will have run out by the mid terms.

Washington Post columnist Ezra Klein, in a recent post, pointed out the world ‘desperately wants to lend us money,’ and argued we should invest that money in America.  Failing to do so, he said, is an ‘epic failure of fiscal management.’

The world financial markets are awash in cash looking for a place to go.  Sovereign nations, even those like Japan with huge debt levels, are able to borrow money up to 10 years out at negative real interest rates–that’s the nominal rate minus the inflation rate.  The same is true for the US, which can currently borrow money at the 10 year point at negative rates of interest–real rates that are almost -1.4%.  This is astonishing.  It’s never happened before.

So what’s going on?  The problem is the private economies, as opposed to  the public financial sphere, simply don’t want to invest right now.   Due to the shock of the Great Recession in the North Atlantic (US and Europe primarily), a shock caused by the over use of credit or leverage in the private sector, the private sector is paralyzed as households, banks and corporations all shore up their balance sheets at the same time.   No one wants to borrow.  There may be the intermittent investment, such as that which sustains the technology industry overall, but in terms of the global economy this by itself is insufficient to jar private investors away from safe havens, such as sovereign debt in big developed countries with their own currencies.

The thing is, properly applied credit creates economic growth.  So credit by itself isn’t a real problem.  It’s the use of credit where problems arise.  In the most recent example, particularly in the US but also in several European countries especially Spain, the credit flooded the property markets and built a bubble that burst.  It was a classic example of mal-investment on an epic scale.  And not for the first time in history.

So what to do now?  The credit hasn’t truly disappeared, it’s just that the private sector has no use for all the credit available.

The tonic is for governments to take advantage of this logjam (represented by those historically low interest rates) and to borrow and invest.  The simple fact is there’s trillions of dollars of work that can be done right now by governments.  Infrastructure expansion and modernization probably tops this list.  Many projects are already identified and doing them now would provide a substantive boost to employment.

Research and development should be high on the list too, in medicine, in biology, in technology and nano-technology, in energy sustainable and otherwise, in energy transmission systems and pipelines, in chemistry, in organic farming and foods, in pure science research everywhere.  Will all this investment be profitable?  No, but then it never is all profitable.

The message of all this cash sloshing around with nowhere else to go, is to open up pathways for it to be applied.  It would be nicer if the private economy could provide the pathways, but that’s simply not going to happen until the asset side of those balance sheets is repaired–a process that history shows conclusively can take many years without help.

So help should be provided.  There’s no lack of capital.  There’s no lack of work.  There’s no lack of labor available to get that work done.  Let’s get to it!

The idea that government can’t create jobs, or boost economic growth, has no basis in fact.  That the government can and does help the economy, directly and indirectly, goes  back to the earliest days of the nation.  Washington Post columnist E. J. Dionne Jr., addresses the truth in a recent opinion piece.

….The case for government’s role in our country’s growth and financial success goes back to the very beginning. One of the reasons I wrote my book “Our Divided Political Heart” was to show that, from Alexander Hamilton and Henry Clay forward, farsighted American leaders understood that action by the federal government was essential to ensuring the country’s prosperity, developing our economy, promoting the arts and sciences and building large projects: the roads and canals, and later, under Abraham Lincoln, the institutions of higher learning, that bound a growing nation together.

Both Clay and Lincoln battled those who used states’ rights slogans to crimp federal authority and who tried to use the Constitution to handcuff anyone who would use the federal government creatively. Both read the Constitution’s commerce clause as Franklin Roosevelt and progressives who followed him did, as permitting federal action to serve the common good. A belief in government’s constructive capacities is not some recent ultra-liberal invention.

Decades of anti-government rhetoric have made liberals wary of claiming their legacy as supporters of the state’s positive role. That’s why they have had so much trouble making the case for President Obama’s stimulus program passed by Congress in 2009. It ought to be perfectly obvious: When the private sector is no longer investing, the economy will spin downward unless the government takes on the task of investing. And such investments — in transportation and clean energy, refurbished schools and the education of the next generation — can prime future growth.

Yet the drumbeat of propaganda against government has made it impossible for the plain truth about the stimulus to break through. It was thus salutary that Douglas Elmendorf, the widely respected director of the Congressional Budget Office, told a congressional hearing last week that 80 percent of economic experts surveyed by the University of Chicago’s Booth School of Business agreed that the stimulus got the unemployment rate lower at the end of 2010 than it would have been otherwise. Only 4 percent disagreed. The stimulus, CBO concluded, added as many as 3.3 million jobs during the second quarter of 2010, and it may have kept us from lapsing back into recession.

So when conservatives say, as they regularly do, that “government doesn’t create jobs,” the riposte should be quick and emphatic: “Yes it has, and yes, it does!”

Indeed, our unemployment rate is higher today than it should be because conservatives blocked additional federal spending to prevent layoffs by state and local governments — and because progressives, including Obama, took too long to propose more federal help. Obama’s jobs program would be a step in the right direction, and he’s right to tout it now. But he should have pushed for a bigger stimulus from the beginning. The anti-government disposition has so much power that Democrats and moderate Republicans allowed themselves to be intimidated into keeping it too small.

Let’s turn Ronald Reagan’s declaration on its head: Opposition to government isn’t the solution. Opposition to government was and remains the problem. It is past time that we affirm government’s ability to heal the economy, and its responsibility for doing so.

Beezer here.  The steady drumbeat against government, crystalized by President Ronald Reagan in political mythology, but almost completely absent in the history of the United States, is having its predictable negative effects on our national economy.  We are in danger of double dipping because Congress refuses to create new jobs through infrastructure projects that no one disagrees should be done.  The dramatic shrinking public sector in cities and towns has clipped more than 1% off our growth rate.  The foolish ‘more is less’ economics behind Congresses’ obstruction of job creation via government direct spending threatens to raise unemployment and, once again, crash asset prices.

From the New York Times:

Make no mistake, the Bush tax cuts, and the series of tax cuts piled on since the economy plunged into deep recession beginning in 2007, are the primary cause of deficits and a major contributor to projected long term debt.

From an article by Bruce Bartlett, top economic advisor to former President Ronald Reagan among other leading conservative Republicans at the time.

But revenue has been below 15 percent of G.D.P. since 2009, and the last time we had three years in a row when revenue as a share of G.D.P. was that low was 1941 to 1943.

Revenue has averaged 18 percent of G.D.P. since 1970 and a little more than that in the postwar era. At a similar stage in previous business cycles, two years past the trough, revenue was considerably higher: 18 percent of G.D.P. in 1977 after the 1973-75 recession; 17.3 percent of G.D.P. in 1984 after the 1981-82 recession, and 17.5 percent of G.D.P. in 1993 after the 1990-91 recession. Revenue was markedly lower, however, at this point after the 2001 recession and was just 16.2 percent of G.D.P. in 2003.

The reason, of course, is that taxes were cut in 2001, 2002, 2003, 2004 and 2006.

It would have been one thing if the Bush tax cuts had at least bought the country a higher rate of economic growth, even temporarily. They did not. Real G.D.P. growth peaked at just 3.6 percent in 2004 before fading rapidly. Even before the crisis hit, real G.D.P. was growing less than 2 percent a year.

By contrast, after the 1982 and 1993 tax increases, growth was much more robust. Real G.D.P. rose 7.2 percent in 1984 and continued to rise at more than 3 percent a year for the balance of the 1980s.

Real G.D.P. growth was 4.1 percent in 1994 despite widespread predictions by opponents of the 1993 tax increase that it would bring on another recession. Real growth averaged 4 percent for the balance of the 1990s. By contrast, real G.D.P. growth in the nonrecession years of the 2000s averaged just 2.7 percent a year — barely above the postwar average.

Much is made of spending projections for Medicare, Medicaid and Social Security but it’s seldom mentioned that even those rising costs could be covered if Congress rolled back it’s tax cutting frenzy of the past 12 years.

Tax collections could keep pace with those costs if Congress permitted the George W. Bush tax cuts to expire on schedule in 2012 and allowed the alternative minimum tax to hit millions of additional households, the CBO said. But under current tax policies, the CBO said, tax collections would barely cover the cost of the health and retirement programs alone by 2035.

Economics professor Robert Reich, former Secretary of Labor under President Bill Clinton, nails down how the solve our long term budget debt.

 

Stop the Austerity Train Wreck! 

The biggest question right now on Planet Washington is whether the congressional supercommittee will reach an agreement.

That’s the wrong question. Agreement or not, Washington is  on the road to making budget cuts that will slow the economy, increase unemployment, and impose additional hardship on millions of Americans.  

The real question is how to stop this austerity train wreck, and substitute the following: 

FIRST: no cuts before jobs are back – until unemployment is down to 5 percent. Until then, the economy needs a boost, not a cut. Consumers – whose spending is 70 percent of the economy – don’t have the money to boost the economy on their own. Their pay is dropping and they’re losing jobs.  

SECOND: Make the boost big enough. 14 million Americans are out of work, and 10 million are working part time who need full-time jobs. The President’s proposed jobs program is a start but it’s tiny relative to what needs to be done. It would create fewer than 2 million jobs. We need a big jobs program – rebuilding America’s crumbling infrastructure, and including a WPA and Civilian Conservation Corps.

THIRD: To pay for this, raise taxes on the super-rich. It’s only fair. Never before has so much income and wealth been concentrated at the very top, and taxes on the top so low. Go back to the 70 percent marginal tax we had before 1980. And include more tax brackets at the top. It doesn’t make sense that any income over $375,000 is taxed at the same 35 percent, even if it’s a billion dollars. And tax all sources of income at the same rate, including capital gains.  

FOURTH: Cut the budget where the real bloat is. Military spending and corporate welfare. End weapons systems that don’t work and stop wars we shouldn’t be fighting to begin with, and we save over $300 billion a year. Cut corporate welfare – subsidies and special tax breaks going to big agribusiness, big oil, big pharma, and big insurance – and we save another $100 billion.

Do you hear me, Washington? Do these four things and restore jobs and prosperity. Fail to do these, and you’ll make things much, much worse.

Beezer here.  The problem is that the GOP is totally owned by those in the top 1% of the income pyramid.  The nation’s wealthiest families use the GOP as a tool to protect their corporate subsidies and the tax breaks available only to the wealthy.  So far their influence in Congress has managed to control the national discussion of what to do, concentrating this discussion mainly on cutting federal programs that benefits the non-wealthy such as Medicare, Social Security and Medicaid instead of rolling back a dozen years of piling tax cut upon tax cut that have almost entirely further enriched the already wealthy.  The GOP promotes austerity programs for everyone but their 1% benefactors, even as poll after poll shows that the majority of citizens understand tax cuts are a huge part of the problem.  The GOP ignores these polls because they don’t represent the majority of Americans.  They represent a very small slice of America, the 1% who own them and to whom they owe their allegiance.  We don’t think this allegiance will survive the 2012 elections because the austerity is already being felt by the majority at the municipal level.  Services are being drastically cut at this level, not to mention the GOP proposals to extend cuts even further.   Congressional approval levels are in the single digits, below those for British Petroleum during the Gulf Oil spill disaster.   Obama’s levels are below 50%, but even at those levels the President’s approval rating is four times that for Congress.   Occupy Wall Street protests bring nothing but derision from GOP politicians, who portray the participants as nothing but unemployed malcontents who want to destroy Capitalism.  They are wrong.  Many of the participants are employed.  And many of those who are not employed are college graduates who face huge tuition debts they cannot pay back without jobs.  These young adults have parents.  The GOP response for them to ‘suck it up’ while the wealthiest 1% rake in all the income is not going to fly politically, in our opinion.  Obama appears finally to understand the overall situation and is relentlessly pressing for passage of a jobs act in the face of GOP opposition.  He should not only continue but he should up the ante by increasing the size of the jobs act.    Hiring directly to rebuild America’s crumbling infrastructure is the single policy that will begin economic recovery.  When the GOP controlled Congress balks, he should  portray Congress as a ‘do nothing’ Congress as did Truman after WWII.   Let the tax cuts expire, the money is being hoarded.  It isn’t being invested and not enough is being spent on consumption because GOP tax cut politics have starved the 99% so much they can no longer consume enough to support Main Street businesses.  Reich is correct.  If the GOP is not stopped, the nation is in for a real train wreck.