Opinion

The Great Debate

Larry Summers is playing economic Jeopardy

Editor’s note: This op-ed was originally published at the Financial Times in response to the recent piece by Lawrence Summers for Reuters. It has been republished, verbatim, with the FT‘s permission.

Larry Summers’ considerable intellect suggests that he would be an excellent contestant on the popular game show Jeopardy. Of course, on the show, the question offered by the contestant must match the answer on the board. Summers and I disagree on the answer that matches the question “What is President Obama’s budget?” Let’s see why.

I asked two questions in an op-ed in Wednesday’s Wall Street Journal. (Neither question was addressed by Mr Summers, or in the simultaneous parallel critiques offered on the airwaves by US Treasury Secretary Timothy Geithner and former Council of Economic Advisers Chairman Austan Goolsbee). The first question was whether the tax increases on high-income individuals proposed by President Obama (the Buffett rule, higher taxes on dividends and capital gains, a higher top marginal rate, and so on) raised enough revenue to materially offset the country’s large budget gap or higher federal spending under President Obama. The answer, using revenue estimates from the Treasury Department and spending estimates from the President’s budget is ‘No’. The second question was what that spending growth implied for future tax rates. That is, if federal spending as a share of gross domestic product was to increase permanently as the president proposes, by how much would taxes need to rise? Answer: a lot and for everyone. This simple thought experiment presumes that we will not ratify permanently larger deficits.

Without addressing these questions, Mr Summers proposes a different one. President Obama’s budget is supposedly fiscally sound because the Congressional Budget Office (CBO) has estimated that the budget would stabilise federal debt as a share of GDP for a short while. Yet, let’s look at what the CBO said. First, while the CBO shows the debt-to-GDP ratio stabilizing for a period of time – at an uncomfortably high level – in the budget window, it is not stable in the long run. Second and more importantly, in its April 20, 2012 report, the same CBO that Summers cites so selectively observed that the permanent deficits in the President’s budget would reduce the level of economic activity. By CBO’s estimate, under the President’s proposals, the CBO estimates for the 2018-2022 period, that the nation’s real output would be between 0.5 and 2.2 per cent lower compared to what would occur under current law. This adverse effect would grow in the future, as deficits continue to mount.

The President’s budget has met with little success in Congress. The 2013 budget was voted down in the House of Representatives, 414-0. The Senate did not bring the 2013 budget to the floor, though the 2012 budget was voted down in the Senate, 97-0.

Obama’s power grab at the Pentagon

President Barack Obama’s decision last week to cut the defense budget by $487 billion over the next 10 years was met with cries of derision from his critics (“inexcusable,” said GOP front-runner Mitt Romney) and shrugs of acceptance from his supporters. The reduction’s two headlines: 1. One hundred thousand troops are being chopped from the Marine Corps and Army; 2. The entire U.S. foreign policy focus will begin to shift from the Near East to the Far East (anxieties about China having replaced—or at least settled alongside—our permanently ingrained fears of Middle Eastern terror). The cuts themselves, though, are less significant as fiscal policy than as a statement about President Obama’s relationship with the Pentagon: Barack is taking it over.

That President Obama wasn’t really in charge of the Defense Department might come as something of a shock. He is, after all, the commander in chief. But considering the size of the nation’s defense apparatus, it shouldn’t. The Pentagon has become the 51st state—America’s largest bureaucracy, employing three times more people than the population of Vermont and Wyoming combined. Its capital is the Five-Sided Puzzle Palace, as my journalist friends fondly call it, where 23,000 work daily. Its other residents are the 3.2 million military, intelligence and civilian personnel who live inside its borderless confines around the globe. And since the attacks of September 11th, the influence of the Pentagon’s constituency has grown exponentially, its budget increasing from $295 billion to $549 billion, sucking up some 54 percent of federal tax dollars.

The Pentagon has found plenty of ways to spend all that cash. In 2011, the DoD blew $20.2 billion on air conditioning in Iraq and Afghanistan, equivalent to the entire NASA budget. There are more members of the U.S. military bands—and more sailors on a single aircraft carrier—than in the State Department’s entire foreign service. Up close, the largesse of the Pentagon is hard to miss as well: When top generals visit a country overseas, they often travel in their own private jets, with an entourage of dozens. Top diplomats fly commercial, business–or first-class, if they’re lucky. (Meanwhile, in Foggy Bottom, Secretary of State Hillary Clinton forbade business-class travel for State officials traveling to Afghanistan in 2010, citing budgetary concerns, department officials have told me privately.)

from David Rohde:

Yes, we’re creating jobs, but how’s the pay?

Update: The December job numbers released this morning continued the same trend described in yesterday’s column. Of the 200,000 new jobs created last month, 78,000 – or nearly 40 percent -- were in transportation, warehousing and retail, sectors known for low pay and seasonal hiring. In a far more positive sign, manufacturing gained 23,000 workers in December after four months of little change. A vast expansion of that trend would benefit the middle class tremendously.

WASHINGTON -- Between now and November, middle class Americans are going to hear an enormous amount of bragging about job creation.

Mitt Romney will tout his role in the creation of Staples, The Sports Authority and Domino's, three firms that he says created 100,000 jobs. Barack Obama will say 2.9 million jobs have been created since March 2010, and highlight a surge of 140,000 new private sector jobs in November.

from Paul Smalera:

How Obama wins the election: the economy, stupid, and everything else

By Paul Smalera
The opinions expressed are his own. 

Mitt Romney and Newt Gingrich, and the entire Republican presidential field before them, have enjoyed painting Barack Obama as a European-style socialist, an apologizer, an appeaser, a president who is ceding America’s place in the world. Their stump speeches and debate soundbites seem to always end with some variety of the phrase, “when I’m your president, I’ll make America great again.” It would seem the nation is hungry for that kind of leadership; after all, polls now say that Obama’s job approval ratings are worse than Carter’s at the same point in his term. The game clock would seem to be running down on his re-election hopes. But what if it turns out we’ve been reading the scoreboard wrong, and Team Obama already has the lead? What if, by the time Americans get to vote, less than a year from now, America is already great again?

Coming off the heels of a nasty recession and horrible intertwined crises in banking, housing and economic confidence, every decision President Obama and his team made on the country’s way forward has come under intense scrutiny. Inevitably, the left has called some decisions, like the smaller-than-hoped-for size of his stimulus bill, weak sauce. The right has decried everything this administration did, as with health care reform, as lurching us towards socialism. Even Rockefeller Republicans have changed their spots in order to make libertarian arguments, as when Mitt Romney argued in the New York Times that the auto-industry bailout was wrong and Detroit should have been allowed to go broke.

One shouldn’t feel bad for Obama -- this kind of scrutiny comes with the job, after all. But the criticism his administration has endured from all sides has seemed particularly craven, perhaps because the stakes have been so very high these past few years. And yet, the political capital invested in his centrist, negotiated policies are now paying dividends. Perhaps Bill Clinton was a smoother operator, but it’s beginning to look a lot like Obama’s triangulation of policy, politics and the press is working, and that may deliver him to a political comeback and a 1996-style election victory.

from Ian Bremmer:

Romney’s foreign policy: Reagan redux

By Ian Bremmer
The views expressed are his own.

After yet another GOP debate where foreign policy took a near-total backseat to economic and domestic policy, Mitt Romney is in the catbird seat for the nomination. He even locked up the endorsement of Tea Party AND Republican machine favorite, New Jersey Governor Chris Christie. Romney’s only problem: it’s October 2011. Not one primary has yet taken place. Romney will have to return to his foreign policy platform to expand it, should he be fortunate enough to make it to the general election. And based on the speech he gave at The Citadel, we can already see that Mitt Romney intends to return to the American exceptionalism of the Ronald Reagan and George W. Bush eras.

For Romney, as for many politicians of both parties in decades past, the United States is not just a big and powerful country. Rather, it is the only country in the world that deserves superpower status. What’s unfortunate for Mitt and his all-star, Bush-heavy foreign policy team is that, these days, that line of thinking is more nostalgic than realistic. (By the way, though Romney was almost bombastic at times, calling Iran’s leaders “suicidal fanatics,” his actual policies are unlikely to reflect or adopt that tone -- at least not with his foreign policy team as constituted now.) The idea of the U.S. as the leader of the free world is at a post-WWII nadir. However, that’s not because some other country, like China, has risen to fill the vacuum. No, the fault is wholly our own.

In fact, right now there’s a global debate about whether the U.S. really deserves its superpower mantle, given the political and economic issues of recent years that have unquestionably eroded its leadership position. It’s helpful to compare the two camps:

Washington’s long con

By Maureen Tkacik
The opinions expressed are her own.

There’s a scene in Ray Nagin’s Hurricane Katrina memoir from the Monday night after the storm in which twenty or thirty mysterious security guards, toting three guns apiece, suddenly descend upon the bombed out Hyatt city officials are using as a command center and commence measuring perimeters, laying down wires and barking orders. “We’re here to protect the mayor!” their apparent leader proclaims. “Everyone else leave!”

Nagin watches, “hallucination-like”, as his two preposterously outmanned bodyguards give the guards their best “Oh, hell no” glares, then politely asks the guards: “Who are you guys, and who sent you?” He has well-founded suspicions they are Blackwater mercenaries hired by the local business community, but the leader won’t divulge anything, so he and his staffers just keep asking the same questions of every guard they can corner, until the entire team suddenly vanishes en masse, “Ninja-like, as quickly and quietly as they arrived.”

Of the unnervingly frequent Bush Administration flashbacks I suffered reading Ron Suskind’s Confidence Men: Wall Street, Washington and the Education of a President, Nagin’s staredown of the elite hired guns is the one Obama never manages to repeat.

Why Obama needs a primary challenge

By Nicholas Wapshott
The opinions expressed are his own.

There is talk in the air of a Democratic challenge to Obama. Since the Tea Party won the battle of the debt ceiling, it has been solid bad news for the president, and his party is wondering whether he is capable – or even genuinely wants – a second term. It is all very well being the world’s coolest guy, but, when you are leader of a party losing rock solid safe seats and alienating the very independent voters who decide who lives in the White House, you may be  leaving it a bit late to turn the tide. In the latest teasing McClatchy-Maris poll, Obama is both facing defeat — Americans say they will vote against him by 49 percent to 36, with 52 percent to 38 predicting he will lose — but he would beat every GOP candidate currently on offer.

No sooner had James Carville shouted “Panic!” about the state of drift in the West Wing, and demanded that “a lot” of heads roll, than Al Gore’s nemesis, Ralph Nader, announced he was championing a Democratic primary challenge to Obama from half a dozen candidates, though Nader is not even a registered Democrat. According to the Washington Times, an unlikely bellwether of liberal thinking, “More than 45 Democrats are supporting the move, and the candidates will be experts in fields ranging from poverty to the military.”

Among the mavericks named to lead this progressive revolt are the Princeton professor who starred in The Matrix Reloaded movie, Cornel West, the Zen Buddhist priest and actor Peter Coyote, the singer of Anchorage, Michelle Shocked, and the Democrats’ answer to William F. Buckley Jr., Gore Vidal. Asked whether he would be a stalking horse, the usually immodest kamikaze presidential wannabe Dennis Kucinich said he would decline the chance to stand himself, but said, “I think he should [face a Democratic challenger]. It would make him a better president.”

Why the wealthy don’t object to Obama’s “class warfare”

By David Callahan
The opinions expressed are his own. 

Here in the egalitarian paradise of the United States, there is apparently nothing worse than “class warfare” – which is why Republicans are trying to affix this damning label to President Obama’s new plan to raise taxes on the rich. One hitch, though, is that the billionaire Warren Buffett is not alone in his willingness to pay higher taxes. Many other wealthy Americans are also ready to see their taxes go up. The battle over taxes, its turns out, is not just between the rich and everyone else; the upper class itself is divided on this issue. That is good news for Obama, who’ll need all the help he can get to enact deficit reduction that balances spending cuts with new revenue.

Various wealthy Americans have praised the President’s tax plan since it was unveiled Monday. “It’s time for millionaires – like me and the ones in Congress – to step up to the plate and start paying their fair share,” said Guy Saperstein, a wealthy lawyer who is part of a group called Patriotic Millionaires for Fiscal Strength. Dallas Mavericks owner Mark Cuban, not exactly known for his noblesse oblige, chimed in, writing on his blog right after Obama’s speech that paying taxes is the most “patriotic thing you can do.”

Obama’s call for higher taxes on the rich is not new. He pledged repeatedly to raise taxes on high earners during his 2008 run for President – and won the vote of these same Americans, those making over $200,000, by a comfortable margin.

The case for Obama’s jobs program

By Betsey Stevenson
The opinions expressed are her own.

What should we make of the President’s new jobs plan? Ignore the politics — will it pass? — and focus on the economics: If it does, will it get Americans back to work?

The centerpiece is a series of sharp payroll tax cuts. The usual problem with payroll taxes is that they largely subsidize existing workers. But this plan — three separate payroll tax cuts — is different.

The first tax cut is the most innovative: No payroll taxes at all for firms increasing their wage bill. In economics, all the action is at the margin. If we want people to do more at the margin — hire more people — then the incentives to do so should be targeted at the margin. We will get much more bang-for-our-buck by giving the biggest tax breaks to the hiring of extra workers.

The jobs proposal ignores economics

By David Callahan
The opinions expressed are his own.

It’s a cruel fact for millions of unemployed Americans that the jobs plan President Obama unveiled last night will never be fully enacted by Congress. What’s even crueler, though, is that the least effective elements of the plan have the best chance of passage. New direct federal spending, the most powerful form of stimulus, is widely considered DOA on Capitol Hill – while weaker tax cut options will get a real hearing.

That’s not how things would go if mainstream economists were calling the shots. Economics is not an exact science, but economists do have pretty good models to predict what “fiscal policy multipliers” will be most effective at stimulating growth and new hiring. Just last month, for example, the chief economist for Moody’s Analytics Mark Zandi released an analysis of stimulus measures work. Zandi advised John McCain in 2008 and is anything but a committed liberal. But his study, supported by the full weight of Moody’s modeling expertise, clearly shows that spending is the best form of stimulus.

The single most effective form of stimulus, the study found, are increased outlays for food stamps — which create $1.71 in economic activity for each dollar in federal spending. The other top two boosters are spending on unemployment benefits and infrastructure. Earlier studies, including by the Congressional Budget Office, have found largely the same thing.

  •