Gregg Easterbrook

The global economy doggedly refuses to re-start. Employment is flat, demand is flat, prices are flat, housing sales are flat, growth is nearly flat.

Stagflation and inflation, the old fears, have given way to the flatline economy. Sometimes flatlined patients can be revived. Clear! But what should the therapy be?

Republicans are responding to the flatline economy by demanding what they are programmed to demand — tax cuts for the upper class. Democrats are responding to it by demanding what they are programmed to demand — more government spending.

Both approaches have already been tried, and both don’t work. Only a gridlocked partisan political system would keep demanding more nostrums.

Federal income taxes were cut significantly in 2001 and again in 2003. The recession of 2008 began under a regime of tax cuts. The tax cuts probably did not cause the recession, but they obviously did not stop it either. Federal taxes were cut again in 2010, this time both income and payroll taxes were reduced. No response from the flatline economy.

Lower taxes are nice, of course. But when an idea – tax cuts to spur the economy — has been tried three times, at the cost of trillions of dollars in national debt, and it hasn’t worked, it is time to accept that tax cuts are not the solution.

Stimulus spending has been enacted twice, in 2008 and again in 2009. Lack of reduction in government spending despite declining government receipts is a Keynesian response. Since the 2008 recession began, no federal spending program has known any meaningful reduction, while many have been pumped full of funny-money. Since 2008, the United States has borrowed and spent $5.5 trillion, and is on track to borrow another $1.2 trillion in 2012. Another  $450 billion in borrowing will be added if President Barack Obama’s latest stimulus bill is enacted.

That means more than $7 trillion in borrowing for the economy in just five years, roughly the amount per capita, in today’s dollars, the United States borrowed during World War II. Amazingly, some commentators call this “austerity.” Whatever the label, the Keynesian borrow-to-spark-demand formula has not worked. It is time to accept that more government spending is not the solution.

If more borrowing or more tax cutting aren’t what the economy needs, what is? Optimism. Human psychology is a bigger force in economics than current policy debate acknowledges.

In 2005, many fundamentals of the economy were worrisome – a housing bubble, highly leveraged banks and investment banks, a profusion of liars’ loans. Yet the economy boomed, partly because optimism was universal.

In 2011, many fundamentals of the economy are sanguine – high corporate profits, no resource shortages, low interest rates, ample money supply, low international tensions. Yet the economy is flatlined, partly because there is little optimism.

Consumers make decisions about whether to spend, and corporations make decisions about whether to invest, based mainly on whether they are optimistic. Psychological research shows expectations about the near future to be a more powerful motivator than circumstances of today.

As social scientist Carol Graham of the Brookings Institution noted in her 2009 book “Happiness Around the World“: “In economics, individuals’ expectations about the future are as important as objective trends in the present.”

In his 1995 book “Demosclerosis”, Jonathan Rauch warned that “the rise of entrenched interest groups” using ever-improving lobbying tools would slow economic growth by “locking in subsidies, rewarding political bickering and discouraging concern for the greater good.” Rauch argued that use of government to channel favors to campaign donors and voter blocs will grow steadily worse until government enters gridlock. That, it turn, will cause economic growth to stagnate, while reducing optimism about the American prospect. Rauch’s book, sadly out of print, seems eerily word-for-word a forecast of 2011.

Gridlock prevails in Washington, with politicians of both parties acting like spoiled crybabies, instead of leaders. This causes pessimism regarding the future – which is likely a larger factor in the flatline economy than government spending levels or tax policy.

Footnote: Don’t like my theory that lack of optimism is the core economic problem? Then check Jeremy Rifkin’s new book “The Third Industrial Revolution”, which offers a different explanation.

Rifkin has a reputation as a goofy futurist, but often his analysis is astute. The book argues that recent economic turbulence syncs less with financial shenanigans than with the price of oil. When the U.S. economy begins to grow, oil prices shoot up; that makes demand fall, dampening expansion; lower demand causes oil prices to decline, and growth resumes; oil prices then rise, dampening growth. Rifkin shows that the less oil-addicted an economy is, the more consistent its economic expansion. This is a disturbing message at a time when the same forces causing gridlock in politics are resisting attempts to move the United States beyond oil.

All the leading Republican presidential contenders except Jon Huntsman are denouncing government, with high vituperation. Yet all have spent some to most of their adult lives as office-holders, enjoying the perquisites of government and pocketing some of the public spending they say they oppose.

This a bit like a used-car salesman claiming to be a consumer crusader or a high-class madam denouncing Internet porn. Why does anyone believe politicians who shake their fists against government while comfortably ensconced as government insiders?

Consider:

* Rick Perry, the putative Republican frontrunner. After college he joined the Air Force – an admirable form of service, and also a secure government job. Afterward, he spent seven years in cotton farming, where federal price supports insulate growers against free-market competition. Since then, Perry has been a government employee: first in the Texas state legislature, then as Texas Agriculture Commissioner, then lieutenant governor, then governor of Texas. Now Perry is campaigning for a federal job with a $400,000 salary and very substantial subsidized lifetime benefits.

* Michele Bachmann. After graduating from law school, she worked as an attorney for the Internal Revenue Service, a secure government job. Then she spent about a decade raising children. Since 2000, she has been a public official, first in the Minnesota state Senate, now in the U.S. House of Representatives.

* Newt Gingrich. After graduating from college, he worked as a lecturer at two publicly funded universities, then became a member of the House of Representatives for two decades. Since 1999 he’s more-or-less been a business person. But most of his adult life was spent on the public payroll.

* Ron Paul was a flight surgeon — first for the United States Air Force for two years and then for the National Guard for three years. He then spent eight years in private medical practice (obstetrics and gynecology). He was elected to the House of Representatives, then left briefly to work as an investment advisor. Paul quickly fled the private sector and came back to Congress. Since 1997, he has been a U.S. government employee in a secure congressional seat.

* Of other Republican candidates declared or expected, Sarah Palin worked as a sportscaster before becoming a city official, then a mayor, then governor of Alaska. After law school, Rick Santorum was in private practice for four years before being elected to the House of Representatives and then to the Senate, spending 17 years in Congress. Jon Huntsman has spent much of his life as a government official, but with Huntsman there is no issue because he does not use anti-government invective.

* Mitt Romney is the sole prominent contender for the Republican nomination who has spent most of his adult life in private enterprise. Herman Cain is the sole Republican presidential candidate who has never been on the public payroll — though not for lack of trying. Since 2000, Cain has run repeatedly for office.

So the Republican field is chock with people who say government and government spending are objectionable – after first ensuring they personally benefit from money forcibly extracted from taxpayers’ pockets.

At the risk of quoting Al Sharpton, let me quote Al Sharpton: “Fundamentally, life is a hustle.” Politicians who denounce government, while craving for themselves its benefits, are engaged in a hustle. It’s a hustle that seems to have an appeal. Why?

One reason may be that there’s a sucker born every minute. Voters who say they are angry about government nevertheless are impressed with office-holders who sweep into meetings surrounded by bodyguards, and who have – or at least, pretend they have – tremendous power. You’d expect a true outsider to make the best case against government. Instead, voters seem to pay more attention to anti-government pronouncements from insiders.

Another reason may be that voters want to cover their bases by listening to anti-government vitriol, then reelect incumbents – even though, if it’s true that government is terrible, incumbents are to blame. The latest polls show just 12 percent of Americans think Congress is doing a good job. Yet it’s likely that the overwhelming majority of members of Congress will be reelected.

But there may be a larger dynamic – that voters, not candidates, are the biggest hypocrites.

Suzanne Mettler, author of the terrific, and terrifically important, new book The Submerged State, points out that in a 2008 Cornell Survey Research poll, 57 percent of Americans denied they had ever benefitted from any “government social program.” But then asked specifically if they had used student loans, the mortgage-interest deduction, Social Security and other common government social programs, it turned out almost every one of them had.

The Republican presidential candidates who denounce government, yet enjoy cushy government jobs, reflect the two-faced nature of much of the electorate. Many voters want to huff and puff about how they hate government, all the while drawing government benefits. Their concerns are reflected by candidates who denounce government while being on its dole.

Footnote: the 12 percent of Americans who think Congress is doing a good job, who are these crackpots?

Photo: Republican presidential candidates (L-R): Rick Santorum, Newt Gingrich, Michele Bachmann, Mitt Romney, Rick Perry, Ron Paul, Herman Cain, and Jon Huntsman stand on stage before the start of the Reagan Centennial GOP presidential primary debate at the Ronald Reagan Presidential Library in Simi Valley, California September 7, 2011. REUTERS/Mario Anzuoni

“President Obama announced plans Monday to fund his $447 billion jobs bill largely by raising taxes on wealthier families.”

– Washington Post lead article on 9/13/2011

Bravo! It’s about time a national leader had the courage to use the T word. There is no solution to the federal debt fiasco that does not involve raising taxes on the well-off. Washington’s decade-long allergy to the word tax – or its reliance on silly euphemisms like “surcharge” or “revenue enhancement” – must end. Barack Obama did the country a service by putting this on the table.

Here’s the part the left will not like. Assume the president’s jobs bill is enacted, and is funded not by yet more borrowing but by raising taxes on the well-off. That will pretty much tap out “tax the rich” as a political strategy and rally cry. Unless the economy really takes off, further progress against the debt will need to come from entitlement cuts and raising taxes on the middle class.

Internal Revenue Service data show that in 1992, the effective federal income tax rate on the well-off was 26 percent. Today, after two tax cuts under George W. Bush, the effective rate is about 17 percent.

Obama’s latest proposal would raise the effective income rate on the affluent by about 2 percent. Bear in mind the ObamaCare legislation, most of which does not take effect until 2013 – just after Obama stands for reelection – already is scheduled to raise the effective tax rate on the well-off by about 4 percent. (I’m simplifying rates and policies that are designed to be incomprehensible.)

So suppose ObamaCare goes into law as planned, and the president gets his wish on the jobs bill. The effective federal tax rate on the well-off will rise 6 percent, from the current 17 percent to 23 percent. That’s almost what it was under Bill Clinton, before Bush the Younger began cutting taxes. Not much room left for “tax the rich” as the solution to ever-worsening government red ink.

And this would be before the new supercommittee acts, assuming it ever does. Raising taxes on the affluent to pay for the latest stimulus plan would nearly preclude the supercommittee from using this tactic as a main aspect of deficit reduction. The supercommittee would be forced to concentrate on entitlement cuts and middle-class taxes.

Currently, according to IRS data, about $2 trillion is earned by those with incomes greater than $100,000. The current effective top-end tax rate of 17 percent yields about $340 billion. If that effective rate raises to 23 percent as Obama proposes, then the well-off would pay another $120 billion annually in federal taxes. That helps – and because everything helps, such tax increases must be done. But adding $120 billion a year to federal revenue is not going to solve a deficit projected to run above $1 trillion per annum indefinitely.

Suppose additional tax increases, such as the higher federal top rates President Obama has proposed, were enacted. Obama’s top-rate proposals would raise the effective rate on the affluent to around the 26 percent that Barack and Michelle Obama paid in 2010. That would add about $220 billion per year to federal revenue. Again a big help, but again not alone the solution to trillion-plus deficits.

Even a confiscatory Soak the Rich approach – raising the effect federal tax rate on the well-off to 50 percent – would max out at adding another $660 billion per year to federal revenue, against trillion-plus annual deficits projected out as far as anyone dares to think about this mess. And that’s assuming a Soak the Rich approach would not dampen the economy.

Requiring the well-off to pay more is a step that must be taken, and sooner the better. But unless the economy really booms, there is no scenario in which increased taxation on the affluent can, alone, fix the national debt. (This Tax Policy Center paper has details.) Entitlement cuts simply must happen, and higher taxes on the middle class may have to happen, too.

Bear in mind that while Bush the Younger’s two tax cuts were kind to millionaires, they also reduced income tax rates on the working class and middle class. Today, some 49 percent of Americans pay no federal income taxes at all. They benefit from the system, but pay in nothing. Small wonder that debt keeps getting worse.

Last December, the Deficit Commission found that higher taxes, entitlement cuts and economic growth are all required to deal with the national debt. There’s just no other way out.

So bravo for President Obama being honest about the need to raise taxes on the well-off. Let’s do this right away. And then let’s accept that entitlement cuts and other painful measures still will be needed. The politically palatable, relatively easy step of going after the affluent just doesn’t solve the problem.

On Labor Day, President Barack Obama vowed to put “our construction workers back to work rebuilding America ,” a theme he is expected to repeat in his address to Congress tonight.

There’s plenty of rebuilding to be done. But a combination of top-heavy bureaucracy, union rules, cost-plus profits and graft have made recent federally funded construction projects insanely expensive and slow. The result is more national debt without much contribution to economic growth. Consider:

*Boston’s Big Dig, mostly funded by the federal taxpayer though benefits went exclusively to Massachusetts, was supposed to take 10 years at a cost of $6.2 billion in today’s dollars. Instead it took 21 years and cost $22 billion.

*Seattle wants a 1.7 mile highway tunnel, a kind of Little Dig, that would mainly be paid for by federal taxpayers though the benefits would go exclusively to Washington State. The tunnel is priced at $2 billion, more than a billion dollars per mile. A billion dollars per mile is $16,000 per inch.

*San Francisco wants a new 1.7 mile subway line that would mainly be paid for by federal taxpayers, though the benefits would go exclusively to California. The line is priced at $1.6 billion, just shy of a billion dollars a mile.

*The Washington, D.C. metro is building a mainly federally funded extension from its current Virginia terminus to Dulles Airport. The next leg of the project was just priced at $3.1 billion for 11.5 miles – that’s $270 million per mile, not for subway but for above-ground rail on the median of a highway the public already owns. The price is so extreme that even Secretary of Transportation Ray LaHood, representing an administration that loves to spend borrowed money, says the price must be cut.

*My home county, Montgomery County, Maryland, just outside Washington, D.C., wants $1.9 billion for a 16-mile trolley line which would be mainly funded by federal taxpayers though the benefits would go exclusively to Maryland. That’s $121 million per mile for simple above-ground construction of trolley line.

*The federal government just gave contracts to renovate the Reflecting Pool that fronts the Lincoln Monument. The renovation is expected to take 18 months — longer than it took to build the pool in the first place, 90 years ago when machinery was much less efficient.

*Baltimore wants the federal government to fund a new light-rail line for the city. Set aside why taxpayers in Nebraska or Wisconsin should pay for a system solely for the convenience of Marylanders. In line is projected to cost $2.2 billion for 14.5 miles, about $2,400 per inch, entirely for above-ground work. Construction is projected to require nine years. That’s a pace of 1.6 miles per year. At that pace the First Transcontinental Railroad, completed in 1869 using far less machinery than available today, would have taken more than a thousand years to build.

*On the George Washington Parkway that runs along the Potomac River in the nation’s capital, there is a Depression-era humpback bridge that needed replacement. In January 2008, federally funded contractors began work on this small, low, four-lane, short bridge (80 yards) that crosses a shallow channel. Almost four years later, the job still is not finished. In the 1950s, the three-mile long, 140-foot high, seven-lane Tappan Zee Bridge, spanning the Hudson River at a deep point, took less time to construct. At the pace of the humpback bridge project, the Tappan Zee Bridge would have taken two centuries to build.

There are more examples in this vein. There are pots full of federal funny money – what Nancy Pelosi and others in Congress want Obama to back. Okay, she calls the idea an “infrastructure bank,” not a “pot of funny money,” but the principle is the same. When the funding comes from borrowing by Washington: then businesses, unions and local petty officials have a self-interest in running up the cost while dragging their feet on completion.

Another reason such wasteful and time laborious projects can occur is because of the Project Labor Agreements – what once were called Davis-Bacon regulations – which essentially mandate union wages and work rules on most federal construction projects. Studies show that PLAs add at least 20 percent to construction costs. And it’s work rules, not wages, that are the killers. If you’ve ever driven past a highway rebuilding area where there are large numbers of laborers but no one doing anything, chances are you observed a work rule that required most tradesmen to stop until some trivial task was performed by a specialist.

Congress has gone back and forth on Davis-Bacon/PLA regs for a generation, usually requiring them under Democratic but not Republican administrations. Shortly after taking office, Obama imposed PLAs on most federal construction jobs. This is a reason the infrastructure funding of $830 billion in the 2009 stimulus bill didn’t buy much infrastructure: though it did pay lots of workers to stand around, and lots of construction company executives to sit in air-conditioned offices browsing the Internet.

The taxpayer-be-damned aspect of inflated, slow federal construction work is only one problem. Because projects take so long and cost so much, only a few projects can be afforded and their contribution to economic growth is small. Unless there is fundamental reform in federal construction contracting, having Washington throw more borrowed money down this hole will not benefit the economy much.

The horror stories in this column do not mean government agencies cannot do good work. Have a look at the sparkling new Patriot High School in Nokesville, Virginia, a magnificent 94-acre state-of-the-art facility for 2,300 students, with energy-conservation features, a turf stadium, a large pond for science classes and on-site driver-education range. The school cost $84 million and was completed in two years, which means taxpayers got their money’s worth. Prince William County, Virginia, had to fund the school itself from local taxes so drove a hard bargain. When federal construction contracting is involved, the perverse incentive is to drive the worst bargain possible.

Oh, and the 55-year-old Tappan Zee Bridge? It needs replacement. New York state officials recently asked the federal government to pay most of the projected $16 billion for a new bridge. Converted to today’s dollars, the existing Tappan Zee Bridge cost $655 million.

Photo: The U.S. flag is seen near a work crew demolishing a destroyed apartment building in Joplin, Missouri August 15, 2011. REUTERS/Eric Thayer

If an election is coming, that means each side needs a bogeyman. The Republicans have chosen first, and theirs is the Environmental Protection Agency. Michele Bachman calls the EPA “the job-killing organization of America,” promising to “padlock” its doors. Tea Party leader Eric Cantor says environmental rules are “job-destroying”. Texas Gov. Rick Perry says he “prays daily” for the EPA to be restricted.

Soon Democrats will choose their bogeyman – The Rich are the current frontrunner.

Elections often are dominated by bogeymen – Republicans claim Democrats don’t care about national defense, Democrats claim Republicans want to eliminate Social Security, that sort of nonsense. Environmental bogeymen are appealing to some factions because the issue involves regulatory arcana that hardly anyone understands, and because environmental subjects are poorly reported in the mainstream media.

What’s maddening about the politics of the environment is that both sides consistently assert things that aren’t even close to true. The right claims that environmental regulations hurt the economy – data show the reverse. The left claims the environment is dying – data show the reverse.

Consider environmental rules and the economy. From 1980 to the beginning of the 2008 recession, the very period in which environmental regulations went from few to many, the U.S. GDP rose 124 percent in inflation-adjusted terms. Most of that period was gangbusters for growth and employment. If environmental regulations are “job destroying,” the economy has a funny way of showing it.

Besides coexisting with economic growth, environmental regulation has had other positive impacts. The dramatic decline in air pollution (down 57 percent from 1980 to 2009), coupled to dramatic decline in releases of toxic compounds (down 74 percent since 1980) are central factors in the rebound of American cities.

New York, Chicago, Atlanta, Pittsburgh – economic activity in these places has soared, population rebounded, and real estate values have risen (even taking into account the post-2008 slump) in part because big cities are far cleaner and more desirable than a generation ago. In the 1970s, Los Angeles averaged more than 100 “stage one” smog alerts per year: recently Los Angeles went seven consecutive years without any stage one alert. If smog and toxic emissions had continued rising at the pre-EPA pace, major U.S. cities might have become nearly uninhabitable. Instead big cities have replaced smokestack industry as the engines of 21st century economic growth – see the book The Rise of the Creative Class by Richard Florida.

Yet Republicans claim environmental regulations are bad for the economy because many voters believe it. Same goes for when Democrats claim Republicans want to end Social Security — it’s because many voters actually believe it.

Lowest-common-denominator politics aside, what’s maddening about Republicans making the EPA a bogeyman is that it denies a great American success story. Using innovation and ingenuity, U.S. businesses found ways to cut pollution without harming economic expansion — and not by offshoring either: petrochemical production inside the United States has increased during the period of toxic-emission decline.

America has every right to boast of leading the world in environmental protection. Some of the credit belongs with Republicans – Richard Nixon for founding the EPA, the elder president George Bush for backing a push against acid rain. But in order to say that environmental protection worked, candidates such as Bachmann and Perry would need to admit that federal rules can bring benefits to society. Many on the contemporary right just can’t bring themselves to say this. So Bachmann, Perry and others on the right talk down the United States, ignoring success while crying wolf about problems that don’t even exist.

On the left, the mental blinders are just as bad. All forms of air pollution except greenhouse gases have been in decline for a generation, even as prosperity rises; toxic emissions are in deep decline; water quality is rising almost everywhere; the forested acreage of the United States has been increasing for two decades; many U.S. species are threatened, but extinctions are rare.

Rather than note these things, Democrats and leftists cry doomsday or Republican conspiracy. In a June speech Bruce Babbitt, who was secretary of the Interior under Bill Clinton, decried a supposed Republican “assault on our public lands and water.” The left strongly backs a current EPA proposal to drop the urban ozone standard from 75 parts per billion of air to 60 parts per billion. Previous anti-smog rules have been highly cost-effective; the latest proposal may be an exercise in chasing diminishing returns. But if the proposal passes, Democrats will be able to claim that 85 percent of American cities don’t meet the EPA anti-smog standard. That can be used to make it seem like the industry is despoiling the environment. Though smog itself is declining, making the rule more strict would create a politically pleasing illusion that smog is getting worse.

Many Democrats can’t bring themselves to cite environmental progress because this spoils the script in which Republicans play bogeyman trying to ruin nature. Also, citing the success of American environmental regulations prevents use of the blame-America-first strategy that is dear to the hearts of all too many Democrats.

Lots of EPA regulations are excessively complex, and their transaction costs high: streamlining would be welcome. But that’s a complicated thought. Besides, it’s election season — so bring on the bogeymen.

Here is a past column on the nuttiness of environmental regulation politics.

Photo: The Sierra Nevada Mountains are seen from Air Force One flying north towards Seattle from Los Angeles while carrying U.S. President Barack Obama, August 17, 2010. REUTERS/Larry Downing