Public Sector Layoffs and the Battle Between Obama and Conservative States

Jun 12, 2012Mike Konczal

The government job losses that are holding the recovery back are directly related to the Republican state legislators who were swept to power in 2010.

Last Friday, both presidential candidates had a back-and-forth over the issue of public sector jobs. President Obama said that the private sector is doing fine but the public sector needs help and is threatening the recovery, and Mitt Romney attacked the idea that "we need more firemen, more policemen, more teachers.”

The government job losses that are holding the recovery back are directly related to the Republican state legislators who were swept to power in 2010.

Last Friday, both presidential candidates had a back-and-forth over the issue of public sector jobs. President Obama said that the private sector is doing fine but the public sector needs help and is threatening the recovery, and Mitt Romney attacked the idea that "we need more firemen, more policemen, more teachers.”

This has lead to new interest in the decline of public sector workers over the past three years. Two major economists from Yale, Ben Polak and Peter K. Schott, just wrote a post at at Economix titled "America’s Hidden Austerity Program."

Polak and Schott argue that "there is something historically different about this recession and its aftermath: in the past, local government employment has been almost recession-proof. This time it’s not... Without this hidden austerity program, the economy would look very different. If state and local governments had followed the pattern of the previous two recessions, they would have added 1.4 million to 1.9 million jobs and overall unemployment would be 7.0 to 7.3 percent instead of 8.2 percent."

But why is this happening? Polak and Schott:

One possibility is that we are witnessing a secular change in state and local politics, with voters no longer willing to pay for an ever-larger work force. An alternative explanation is that even though many state and local governments are constrained not to run deficits, they can muddle through a standard recession without cutting jobs. But when hit by a huge recession like that of 1981 or the latest one, the usual mix of creative accounting and shifting in capital expenditures cannot absorb the shock, and jobs have to go.

This drop in public-sector workers is well documented, and it is great to get more economists ringing the bell on it. But I think there needs to be more research into how this has happened. As my colleague Bryce Covert notes over at The Nation, "the massive job loss we’ve been experiencing in the public sector is no random coincidence or unfortunate side effect. It is part of an ideological battle waged by ultra conservatives who were swept into power in the 2010 elections."

As we've written before (article, white paper), the 11 states that the Republicans took over during the 2010 midterm elections – Alabama, Indiana, Maine, Michigan, Minnesota, Montana, New Hampshire, North Carolina, Ohio, Pennsylvania, and Wisconsin – account for 40.5 percent of the total losses. By itself, Texas accounts for an additional 31 percent of the total losses. So these 12 states account for over 70 percent of total public sector job losses in 2011. This is even more important because there was a continued decline in public sector workers in 2011 even though the economy was no longer in free fall.

The 11 states that the Republicans took over in 2010 laid off, on average, 2.5 percent of their government workforces in a single year. This is compared to the overall average of 0.5 percent for the rest of the states. So while it is a nation-wide event, it is concentrated in states that went red in 2011:

Wisconsin, for instance, lost nearly 3 percent of its workforce in 2011 alone, which shows how high the stakes are. Conservatives are tearing down and rebuilding state governance during this Great Recession. There is an element of state and local layoffs that is strictly budgetary, as the average for all the groups is negative. But there is also an element that is about a face-off between President Obama and new conservative state legislatures.

There's two things worth considering about this dynamic. The first is that any stimulus offered from the federal government could be refused or re-directed to other purposes by state governments. The fighting over getting conservative states to accept stimulus money, which was a battle in 2009-2010, would have been much more heated after the 2010 election. And if money did come in under the rubric of helping retain teachers it may, without a political battle, just go to reducing corporate taxes. We are already seeing this with the AG foreclosure fraud settlement money, which is being redirected to other purposes in many states.

The other is that this should be viewed through the lens of the series of standoffs the administration has with conservatives at the state level. The administration has been fighting with Arizona over its "papers please" immigration law, Florida over voter record purges, and several states in battles over GLBTQ rights and reproductive freedom. Trying to keep red states from slashing their workforces in a time of economic weakness is another front in this battle for those trying to steer the economy toward full employment.

Mike Konczal is a Fellow at the Roosevelt Institute

 

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At Netroots Nation with a Panel Thursday

Jun 7, 2012Mike Konczal

I'll be at Netroots Nation for the next several days. If you are here and want to say hi, shoot me an email or a twitter message.
 
Today, Thursday at 4:30pm in room 552, I'll moderating a panel on progressives and the Federal Reserve with Matt Yglesias of Moneybox, Karl Smith of Modeled Behavior, and Lisa Donner of Americans for Financial Reform. If you are there you should check it out.
 
I believe it will stream online, so you can watch it even if you weren't able to make it. Hopefully it'll be viewable in the box below.

 
After the fact it should be viewable online. You can stream other panels at this webpage.
 

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Austerity Replaces Economics With Disciplinarian Ideology

Jun 6, 2012Jeff Madrick

Ludger Schuknecht's insistance on continued austerity is merely a discipinarian's argument, which has already been proven wrong time and again. 

Ludger Schuknecht's insistance on continued austerity is merely a discipinarian's argument, which has already been proven wrong time and again. 

The letter in today’s Financial Times, "Jointly Agreed Strategy is Good for Germany and Europe," from Ludger Schuknecht, the Director General of the German Ministry of Finance, will likely live in infamy. In any case, frame it for your children as a symbol of the folly of mankind. In the sternest terms, Mr. Schuknecht chastises Martin Wolf for demanding a reversal of fiscal austerity. Why? “The public and markets have been led to believe in short-term measures for far too long.” Goodbye to Keynes, and even Friedman.

Moreover, he argues, “it is expansionary policies and weak fiscal positions that created the current problems of high debt and low competitiveness.” Of course, the Eurozone deficit was only 0.5 percent of GDP before the crisis. In Spain, fiscal policy was clearly restrained before the crisis. Few could argue the European Central Bank practiced loose monetary policy over these years.  

According to Mr. Schuknecht, we need “a combination of fiscal consolidation and structural reforms.” And all of this with the goal of rebuilding confidence. How can we be hearing this again, after the failure of austerity in country after country?  Now even the conservative Spanish government is admitting failure.

Evidence is not the issue here. Surely the impressive IMF research on the failure of austerity time and again cannot be simply dismissed. But dismiss it Mr. Schuknecht clearly does. Heaven forbid we introduce Eurobonds, which will undermine the confidence being built.

Clearly the German government sees confidence somewhere, but it is surely not in the financial markets.

I long to ask Mr. Schuknecht what he believes caused the Great Depression. He may have written about this somewhere; I assume he thinks uncertainty and government spending were the causes. I wonder if he can point to one credible case where austerity worked without a concurrent devaluation of the currency.

But such arguments do not seem to turn on evidence or theory.  They come from the stern gut of a schoolmaster, and they come from a nation that has yet to suffer the consequences of the current crisis. The inability or refusal to see ahead is the sure sign of an ideologue. But I think this is not even ideology; it is the instinct of the disciplinarian. And it is mixed with a desire to diminish government. Another rap on the knuckles with the ruler will bring confidence, confidence will bring investment, and investment, prosperity. We were told the same in the 1930s, but never mind all that.  

Roosevelt Institute Senior Fellow Jeff Madrick is the Director of the Roosevelt Institute’s Rediscovering Government initiative and author of Age of Greed.

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Mike Konczal on “Fireside Chats”: Tough Times make Liberal Reform Tougher

Jun 5, 2012Danielle Bella Ellison

In the latest episode of “Fireside Chats,” Roosevelt Institute Fellow Mike Konczal talks with David Frum, Daily Beast writer and author of the new novel Patriots. In the clip below, they take on why Democrats have had trouble gathering support for stimulus programs during the current recession. “We’ve gone from Speaker Pelosi and the new Obama presidency and the idea of this wave of progressive energy to really trying to fight between the center and the center right,” Konczal notes.

In the latest episode of “Fireside Chats,” Roosevelt Institute Fellow Mike Konczal talks with David Frum, Daily Beast writer and author of the new novel Patriots. In the clip below, they take on why Democrats have had trouble gathering support for stimulus programs during the current recession. “We’ve gone from Speaker Pelosi and the new Obama presidency and the idea of this wave of progressive energy to really trying to fight between the center and the center right,” Konczal notes.

As Konczal explains, “The real New Deal that we think of – the core economic security and managing the business cycle and so on – occurred in ’35,” when the economy was expanding. Meanwhile, “the conservative agenda to roll back the Great Society and the New Deal” unfortunately becomes more feasible in tough economic times like ours. The public becomes more risk averse and prefers austerity policies to big and potentially risky spending programs. Major liberal reforms, however necessary and beneficial they may be, are just very hard to pass during bad economic times.

The current grim economic condition, as well as the increase in media culture and accelerating ethnic change, have caused a transformation of American politics. Watch the full conversation below in which Konczal and Frum discuss this transition, what a Romney budget would look like, and the future of Obamacare.

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Mike Konczal: Why We Should Go "All In" on the Volcker Rule

Jun 4, 2012

Last week, CNN International's Felicia Taylor invited Roosevelt Institute Fellow Mike Konczal for a night of poker, pizza, and beer. But this wasn't your typical card game -- it was actually a lesson on what the Volcker Rule is and why we need to ban proprietary trading. In the video below, watch Mike and other experts explain how letting banks gamble with their own money leaves all of us on the hook when they're dealt a bad hand.

Last week, CNN International's Felicia Taylor invited Roosevelt Institute Fellow Mike Konczal for a night of poker, pizza, and beer. But this wasn't your typical card game -- it was actually a lesson on what the Volcker Rule is and why we need to ban proprietary trading. In the video below, watch Mike and other experts explain how letting banks gamble with their own money leaves all of us on the hook when they're dealt a bad hand.

Mike says that the Volcker Rule would draw a bright line between the banks' own reserves, which it wouldn't be allowed to bet with, and its clients' money, which "can be used with adequate permission to go and gamble in the financial markets." Why the need for this distinction? Mike explains that "when you're betting with your own money, as we see with poker and as we see with any other gambling game, sometimes you lose big. You lose big very quickly out of nowhere, and those kind of immediate collapses out of nowhere cause panics, cause contagion." And once the downward spiral begins, it's not just the banks that suffer -- it's the American taxpayers who are forced to step in and cover their losses.

For more, check out Mike's explainer on the Volcker Rule at The Nation.

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What Constrains the Federal Reserve? An Interview with Joseph Gagnon

Jun 4, 2012Mike Konczal

There's a growing consensus right now that the Federal Reserve could be doing more to bring about a stronger recovery given its current powers. It's even more relevant in light of the recent weakening of the recovery, as shown in the poor job numbers that came out last Friday. But there's a lot of disagreement and confusion about the constraints that prevent the Federal Reserve from taking more action.

There's a growing consensus right now that the Federal Reserve could be doing more to bring about a stronger recovery given its current powers. It's even more relevant in light of the recent weakening of the recovery, as shown in the poor job numbers that came out last Friday. But there's a lot of disagreement and confusion about the constraints that prevent the Federal Reserve from taking more action. It's even more confusing given Federal Reserve Chairman Ben Bernanke's past research, where he described the Bank of Japan falling into “self-induced paralysis.” Some believe the constraints are political, others believe they are related to fighting among the various governors, and there are those that believe Bernanke is comfortable with monetary policy as it is.

In order to make sense of the various constraints the Federal Reserve faces, I spoke with Joseph Gagnon, senior fellow at the Peterson Institute for International Economics, over the weekend. Gagnon was an associate director for the Federal Reserve’s Division of Monetary Affairs and Division of International Finance, where he was involved with the execution of QE1. I last spoke with Gagnon on the issue of QE3 last summer.

Mike Konczal: Let's start with the basics. Does a random person -- not at the highest levels, but among those who make up most of the researchers and workers -- at the Federal Reserve think that the Fed is "out of ammo"? What are their opinions on how well previous expansionary monetary policy at the zero bound, like QE2 and Operation Twist, have worked to bolster the economy?

Joseph Gagnon: Let me start by linking to a blog post from a former classmate at his new blog, Miles Kimball’s Balance Sheet Monetary Policy: A Primer, that spells out what the Fed could do and why it would work. However, he ignores some of the legal restrictions on what the Fed can do. (See below.)

My sense is that most Fed economists believe that the Fed does have substantial, though not unlimited, ammo. They also believe QE1, QE2, Operation Twist, and the language concerning future policy intentions (staying near zero interest rates through late 2014) had significant positive economic effects, but not apparently large enough to achieve the rapid recovery that is desired.

Basically, the Fed has run out of ammo in terms of language about future policy intentions because it cannot credibly signal its intentions for more than two to three years ahead. It can extend the “late 2014” horizon into 2015, but that is fairly minor.

In terms of the asset purchases, the Fed is limited by law to the Treasury, agency, and agency MBS markets plus foreign exchange. Buying foreign exchange would be viewed as economic warfare by many countries, so it is probably ruled out even though it reflects rank hypocrisy on the part of foreign governments that are massively buying dollars. In the Treasury market, yields on three-year notes are only 0.3 percent, so the Fed must buy five-year to 30-year bonds to have any effect. With the 10-year yield at 1.5 percent, the scope for further effects is modest. Even if the Fed bought every 10-year Treasury, it would be hard to get the yield much below 1 percent, because the risks on such a bond become tremendously skewed toward future losses. There is more scope to buy agency MBS to lower the mortgage rate, but already mortgage rates are at a record low of 3.75 percent. At some point between 2 and 3 percent we are likely to reach the limit. So, the Fed has quite a bit of ammo left, but we can see that it is not inexhaustible.  

Research I am doing suggests that it would be much more attractive for the Fed to buy a broad basket of U.S. equities to support the stock market than to try to push down bond yields from these already low levels. Sadly, the Fed is not authorized to buy equities, even though other central banks are allowed to do so.

MK: A story is circulating that there has been a lot of internal disagreements among the members of the Federal Open Market Committee (FOMC), and this has prevented Bernanke, who wants to have consensus on the votes, from expanding further. You see this idea in the series of three dissenting votes against more action throughout much of 2011 and the lack of dissenting votes for more action until Charles Evans' in late 2011. Is it your sense that the FOMC composition has held the Federal Reserve in check on expansion?

JG: The hawks will never get more than three votes. This year only one hawk has a vote. Chairman Bernanke and his close allies (Yellen, Dudley, Pianalto, Williams, Tarullo, Stein, and Raskin) have a comfortable majority.

MK: A lot of economics writers assume that Bernanke is uncomfortable with non-unanimous votes and just the presence of vocal, hawkish votes has constrained how far he is willing to go with expansionary actions. Have those divisions held expansion in check in the past, even if there are fewer hawks now? And would more doves on vacant FOMC seats have made a difference in 2009?

JG: I think Bernanke had some preference for unanimous decisions, but not a strong preference. I expect there will be dissents all year. I don’t think mere voting support would have made much difference in 2009 because Bernanke knew he could get whatever he wanted. But a strong discussion leader in favor of greater ease might have made some difference if he was persuasive enough. I believe Bernanke is intellectually much closer to the doves than the hawks, but he and some of the other doves are more cautious than the hawks.

MK: What's your sense of how the economics profession broadly reacts to the idea that the Federal Reserve could be doing more? Do you think a generic economist thinks the Fed could be doing more and isn't, or that the Fed is "out of ammo" in how it can expand the economy?

JG: I think the average economist outside the Fed thinks the Fed has less ammo than the average economist inside the Fed. I frequently hear people say the Fed has done all it can do. I do not agree, but I do see a limit approaching. Note that that limit arises from legal restrictions on the Fed. If the Fed were empowered to buy all assets, it would never run out of ammo.

MK: Others point to political pressure, especially from the right. There have been rhetorical moves, such as Rick Perry saying he’d treat the Federal Reserve "pretty ugly." There is the blocking of nominees, such as Peter Diamond being blocked because “[h]e supports QE2.” And it also has to do with conservative political infrastructure. The Club for Growth put whether or not Republicans supported Peter Diamond for the FOMC on their checklists for proper Republican behavior.

How much does political pressure place a constraint on the Federal Reserve's ability to do more expansion?

JG: Chairman Bernanke would deny that political pressure influences his vote, and he even went out of his way to make a public appearance in Texas after Rick Perry made his threat. But FOMC members all read the papers. They see the virulent opposition to their policies on the right and the silence on the left. (Paul Krugman is a big exception, but he is not a politician.) They want to avoid any Congressional action that would reduce their independence in the future, in part because they think this might lead to even worse economic outcomes than we are currently experiencing.  I think they should stick to achieving their current mandate and not fail to achieve it out of fear of what a future Congress might do. In my view, Congress and the president are solely responsible for making laws and the Fed is solely responsible for achieving its mandate. But I am pretty sure some FOMC members either consciously or unconsciously disagree with me and shade their actions out of this concern.  

MK: Is it a question of balance? I've noticed that there is little political pressure from liberals on the Fed for more expansionary policy. Is it a matter of there being little countervailing pressure?

JG: I think it would help if politicians on the left criticized the Fed more strongly for failing to achieve its employment mandate.

MK: A very popular theory in the financial blogosphere is that the inflation target functions as a ceiling, not an actual target. Ryan Avent has argued that the Fed goes into action to prevent deflation, but once inflation expectations approach 2 percent it pulls back. Matthew O'Brien at the Atlantic Monthly has referred to a 2 percent ceiling as the new cross of gold. And Greg Mankiw has written, “If Chairman Bernanke ever suggested increasing inflation to, say, 4 percent, he would quickly return to being Professor Bernanke.”

Is the 2 percent "ceiling" a serious constraint, and why?

JG: The Fed has said 2 percent is the target, not the ceiling, but I agree that their actions over the past three years are not consistent with their statements. I think we should be willing to accept temporarily higher inflation if that would help to reduce unemployment faster. Indeed, combining actions like QE with an announced willingness to accept temporarily higher inflation could create a synergy that would increase the potency of QE (by reducing the real interest rate). But I fear that announcing a goal of higher inflation, either temporary or permanent, will not actually do anything unless it is backed by actions.

Also, I do not think we should permanently raise the inflation target. It is not necessary to do that to get more monetary stimulus and it would jeopardize the hard-won war on inflation of the past two decades.

MK: There’s the idea that, in the past, economists believed a lack of explicit inflation target gave central banks flexibility, but it doesn't seem that we've seen this flexibility.

JG: The general view is that you do not make up periods of being above or below target, you simply always strive to get back to the target. The problem is that the Fed is not taking this approach equally to unemployment and inflation.

Some have argued for a price path target or a nominal GDP path target. In that case you do make up for past deviations in inflation. But I think it is difficult to explain to the public how the specific path is chosen. Why should the CPI be 105 in 2013, 107 in 2014, 109 in 2015, and so on indefinitely? People care about the inflation rate not, some arbitrary price level. And it means that after booms you must have deflation. Indeed, if one had started the path in the early 1990s, the late 1990s boom would have put us way above it. Then the Fed would have had to make the 2001 recession much more severe to get us back on the path. That would have been a tough sell politically.

MK: There are those that think Bernanke should be much more explicit in declaring expectations. This became a big idea recently after an article by Paul Krugman said that Ben Bernanke has abandoned the insights of Professor Bernanke. Bernanke is essentially doing things that the Fed can't fail at instead of the things he proposed Japan should do in a similar downturn. What's your take on this disagreement?

JG: I think it is sensible for the Fed to stick to statements about things it is confident it can achieve, provided that it feels it is doing enough to achieve its objectives. For example, it can talk about purchasing MBS and pushing down the mortgage rate, thus stimulating the economy. The problem is that it has not achieved its objectives over the past three years and its own forecast shows it does not expect to achieve its objectives over the next three years. My advice is to take stronger actions of the type already taken. But if the scope for doing that runs out, then the Fed has to try riskier actions, including those of the type Paul Krugman described. Among those actions, I would tend to favor those for which the Fed has direct tools, such as buying foreign exchange to push down the dollar, rather than trying to raise inflation expectations by verbal jawboning.

MK: Finally, there are those who think that Bernanke is pretty happy with the rate of recovery and is mostly focused on downside risks. As Bernanke said at his recent press conference, "the question is does it make sense to actively seek a higher inflation rate in order to achieve a slightly increased pace of reduction in the unemployment rate? The view of the committee is that that would be very reckless." Is this, by itself, a significant barrier to future monetary expansion?

JG: Yes, this is a significant barrier. I think it reflects ill-defined concerns about the costs of taking more action to reduce unemployment faster. Some Wall Street economists fear that more aggressive Fed action now will give rise to more inflation in the future, but no Fed economist I know agrees with that. The Fed knows how to fight inflation and there is no reason that policy actions now need to cause excess inflation later. Another concern might be that expanding the Fed’s balance sheet will expose it to greater losses in the future when interest rates eventually rise (because higher interest rates will reduce the value of the bonds the Fed holds).

But the Fed’s mandate does not include maximizing profits. From the point of view of the United States, what matters is the consolidated government balance sheet (Fed + Treasury), and there is no way that QE can do anything but reduce our national debt burden. Any future losses by the Fed would be more than matched by gains to the Treasury.

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Why the Unemployed Are the "Forgotten Man" of 2012

May 31, 2012Tim Price

Instead of finding a solution to the jobs crisis, today’s politicians are making life harder for the unemployed.

Instead of finding a solution to the jobs crisis, today’s politicians are making life harder for the unemployed.

The “Forgotten Man” may be most commonly associated with Amity Shlaes’s book of the same name, an alternate history in which the New Deal made the Great Depression worse. But back in the spring of 1932, while campaigning against incumbent President Herbert Hoover, FDR invoked the phrase in a now-famous radio address. In it, he called for a policy response to the Great Depression that would “rest upon the forgotten, the unorganized but indispensable units of economic power,” policies that would “build from the bottom up and not from the top down, that put their faith once more in the forgotten man at the bottom of the economic pyramid.” The un-Shlaesed among us will recognize that the programs he launched once elected did exactly this, lifting up millions of Americans who had fallen to the bottom of the economic ladder – much to the chagrin of those still clinging jealously to the top rungs. But it seems there’s no such help coming to today’s forgotten men and women, the millions of unemployed Americans who our policymakers alternately overlook or actively punish for their misfortune.

It probably sounds strange to say that the unemployed have been forgotten when the state of the economy is the centerpiece of this year’s elections. But while politicians on both sides of the aisle talk a lot about the economy and jobs in the abstract, they’re easily distracted by minutiae and rarely seem to give much thought to the unemployed as living, breathing people. President Obama’s current economic plan seems to consist of reminding voters that Bain Capital once bankrupted a steel mill in Kansas, while Mitt Romney uses 8 percent unemployment as a cudgel against the incumbent but offers no solutions of his own besides something something tax cuts blah blah confidence.

Meanwhile, as Shaila Dewan reported in the New York Times this week, “Hundreds of thousands of out-of-work Americans are receiving their final unemployment checks sooner than they expected, even though Congress renewed extended benefits until the end of the year.” Over 5 million Americans fall into the category of long-term unemployed, meaning they have been out of work for over six months. Yet by next month, Dewan notes that over half a million of them will have prematurely lost their unemployment benefits this year thanks to cutbacks at the federal level.

At the same time, state governments are forcing new applicants to jump through more and more hoops to get out of paying them the benefits they deserve. Though 27 percent of all unemployed Americans received state benefits last year, Florida Governor and Observer-lookalike Rick Scott cut the number in his state to 15 percent last year by imposing particularly onerous requirements. The most extreme of these efforts was his attempt to subject unemployment applicants to a mandatory drug test, which was blocked (for now) by a federal judge. Florida may not give you your unemployment benefits, but by God, you’re going to give the Sunshine State your urine.

Given how many Americans are out of work, they would seem to form a natural constituency for politicians eager to win over swing voters. (That sounds cynical, but let’s assume for the sake of argument that altruism isn’t a major factor here. I know, it’s a stretch.) Yet instead of courting their support, policymakers are treating them like misbehaving puppies who need to be whacked over the nose with a newspaper. What gives? In part, this is due to conservatives’ knee-jerk opposition to government intervention and their belief that UI benefits can prolong high unemployment by discouraging recipients from seeking work. Studies have shown that UI benefits may be responsible for a fraction of a percentage point of our current unemployment rate, but Mike Konczal has a good rundown of why extending them provides a net economic benefit anyway. Aside from these policy differences, politicians in general just aren’t responsive to the needs and desires of anyone except for their richest constituents and Super PAC funders, who aren’t very concerned about whether some laid off factory worker in Ohio can feed his kids this week.

But there’s more to this conservative opposition than ideology or apathy. Cutting back on benefits is one thing, but why should they go out of their way to denigrate and humiliate the jobless? Mark Schmitt argues that Republicans found themselves adrift after they succeeded in passing welfare reform, since the “specter of the non-working poor could no longer be reliably evoked, and nothing with a similar power to divide voters has emerged to take its place.” But the economic crisis has proven to be a goldmine, providing them with a new underclass of jobless Americans whom they can portray as modern-day welfare queens. Look at these lazy slobs buying flat screens and diamond necklaces with their lavish unemployment benefits while the rest of us slave away at our hedge funds to make ends meet! “Much like arguments blaming the financial crisis on ACORN, Fannie Mae, and the push for low-income homeownership,” Mark notes, this approach “shifts the responsibility for unemployment onto the unemployed themselves.” For many politicians, this is the perfect one-two punch: it gets them the votes they need to win office, and once they’re in office, it takes away their responsibility to actually do anything about the biggest problem facing the country.

Back in 1932, FDR told voters that the Hoover administration had either “forgotten or it does not want to remember the infantry of our economic army.” Today’s Republicans, heirs to the Hoover legacy, would also like to obfuscate the crisis and make us forget the real circumstances of its victims. They know that if Americans see it clearly, they’ll also recognize that the only moral and practical response is one that provides more and better government aid rather than less. If progressive policymakers stop playing dead and start fighting back hard against these cuts to unemployment benefits, they may be surprised by how many troops they can rally to their side.

Tim Price is Deputy Editor of Next New Deal. Follow him on Twitter @txprice.

 

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Defending Krugman: The Importance of Keynesian Economics

May 25, 2012Jeff Madrick

Keynes was right: increased government spending in the U.S. is necessary to decrease unemployment and raise demand in the near-term.

Paul Krugman hardly needs defending, but his views about the need for Keynesian stimulus in the U.S. right now are coming under considerable fire from centrist and left-of-center economists. I find this disturbing because Krugman’s view abides by basic Keynesian principles that seem to have been discarded by many who profess themselves Keynesians. Is there a wide misunderstanding of Keynes?

Keynes was right: increased government spending in the U.S. is necessary to decrease unemployment and raise demand in the near-term.

Paul Krugman hardly needs defending, but his views about the need for Keynesian stimulus in the U.S. right now are coming under considerable fire from centrist and left-of-center economists. I find this disturbing because Krugman’s view abides by basic Keynesian principles that seem to have been discarded by many who profess themselves Keynesians. Is there a wide misunderstanding of Keynes?

What seems to upset people is that Krugman argues the government must spend more money now, almost regardless of what it spends it on. The Keynesian thesis is that economies can settle at a high level of unemployment rather than re-adjust to the optimum unemployment level—or level of economic activity—on their own. This was a response to the classical, pre-Depression view that the beauty of free markets was a self-adjustment process based on falling prices in downturns. But ultimately the problem is a lack of demand, and Keynes advocated budget deficits to support an increase in demand.

The lack of demand in the economy now is palpable. Krugman’s contention is that in the near-term, we can solve this problem if we have the will to do so. The economy can reduce its rate of unemployment fairly rapidly with adequate Keynesian stimulus. It is clear that monetary stimulus at this point is not enough.

This view is not incompatible with longer-term concerns about the economy -- inadequate education for too many, infrastructure decay, old energy technologies, and so on. Many seem to criticize Krugman for not acknowledging “structural” changes in the economy, and they implicitly agree with classical conservative observers that the unemployment rate really can’t fall much below 7 percent. I can’t speak for Krugman, but he seems to be saying that we should not mix up longer-term structural issues with near-term demand inadequacy. It’s very likely the unemployment rate can fall much farther without igniting inflation.

I can’t see how he is wrong about this; indeed, he is urgently right about it. We are facing a year or two when the federal government will likely contract spending and will certainly not increase stimulus markedly. Of even greater concern is the refusal in Europe to recognize that austerity—the opposite of Keynesian advice right now—will lead to further recession, which in turn could spill over to the U.S., jeopardizing Obama’s candidacy.

When so many commentators criticize Krugman’s view, insisting that any new spending must be investment in infrastructure, must not go to the military, or that there should be no new spending at all, they are ignoring the Keynesian process. Krugman will not advocate against military spending cuts (and I certainly wouldn't myself). But priorities are important here. Let’s keep them clear.

In sum, let’s understand that more aggregate demand now will reduce the unemployment rate. There is a near-term solution, not to America’s long-term issues, but to an economy that is sputtering and may lead to a political environment in which those who plan to do more damage win office.  

One of the true advances in contemporary thinking is that both a power and a duty of government is to use fiscal and monetary policy to ameliorate downturns and create economic expansions. This is the legacy of Keynes, well supported by empirical research.  

Roosevelt Institute Senior Fellow Jeff Madrick is the Director of the Roosevelt Institute’s Rediscovering Government initiative and author of Age of Greed.

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The Insane Idea Hidden in the Debate Over Obama's Spending

May 24, 2012Mike Konczal

Instead of debating whether Obama is responsible for a spending surge, we should ask why anyone expects the ratio of spending to GDP to remain constant in a recession.

Instead of debating whether Obama is responsible for a spending surge, we should ask why anyone expects the ratio of spending to GDP to remain constant in a recession.

There's a recent debate about whether or not a federal government spending boom has happened on President Obama's watch. This was kicked off two days ago by Rex Nutting's post at MarketWatch, "Obama spending binge never happened." Nutting notes that "federal spending is rising at the slowest pace since Dwight Eisenhower brought the Korean War to an end in the 1950s." He argues that the 2009 fiscal year, outside the stimulus spending, belongs to President Bush, as it was four months into that budget when Obama entered the presidency. He draws on OMB's numbers, which you can access here.

As you can imagine, the right wing has gone into action. Here's "Actually, the Obama spending binge really did happen" by AEI's James Pethokoukis, which argues that you must look at the government spending as a percentage of GDP to see the increase. Now there's a technical debate about how to approach the numbers in the 2009 fiscal year, and there's a fair debate on how to understand the increase in automatic stabilizers, such as unemployment insurance. Do they "belong" to Obama, given that they were already starting up due to a recession that started in December 2007? And then there's the economic debate: shouldn't the proper response have been to run a much larger federal government spending program?

But underneath it is an insane debate about an insane idea -- that the government should keep a consistent ratio of government spending to GDP in a recession. The attack on Obama is focused on this number without acknowledging the crazy part of what this number actually does in a recession.

Let's run through a quick example to show why I think this is insane. Imagine a government spends 20 percent of GDP this year, there is no expected GDP growth in the next year, and the government will spend the same exact amount of money next year. And then imagine that GDP drops 2.7 percent for the year, as it did from 2008-2009, for this hypothetical economy.

Now even though there is no additional money spent, government spending as a share of GDP will go up. The number goes up if the numerator increases (governments spend more) or the denominator decreases (GDP falls in a recession). It goes up to 20.6 percent in this hypothetical example. If the government wanted to keep the 20 percent ratio consistent, it would have to cut spending. But in a weak economy, in the middle of a recession, the last thing you want to do is cut government spending -- that will make the recession worse, which will decrease GDP further. Then you have to cut government spending even further, which creates a nasty loop.

Federal government spending as a percentage of GDP went from 20.8 percent in 2008 to 25.2 percent in 2009. How much was GDP falling? If GDP had grown 3.4 percent as it had done the year before, instead of dropping 2.7 percent, spending as a percentage of GDP would have gone to 23.7 percent. That means a third of the rise in government spending as a percentage of GDP is a mechanical effect of GDP falling in the Great Recession. And if GDP didn't fall in the Great Recession, automatic stabilizers wouldn't have kicked in and there wouldn't have been the stimulus bill, meaning less spending.

It is worth noting that one reason why the Great Recession wasn't a Great Depression was likely because of the increased size of government spending in the economy compared to the 1920s.  Here's Josh Mason in a great post:

We always ask, why was the Great Recession so deep? But you could just as well turn the question around and ask why, despite initial appearances, did it turn out to be not nearly as deep as the Depression?
 
I can think of four families of answers....The second answer would be that the sheer size of government makes a Depression-scale collapse of demand impossible, regardless of policy. In 1929, with government final demand only a couple percent of GDP, autonomous spending basically was investment spending, especially if we think at the global level so exports wash out. Today, by contrast, G is significantly larger than I (about 20 vs 15 percent of GDP), so even if private investment had collapsed at the same scale as in 1929-1933, the percentage fall in autonomous demand would have been much less. (And of course that fact alone helped keep private investment from collapsing.) Interestingly, despite Hyman Minsky's association with stories about finance, this, and not anything to do with the financial system, was why his answer to the question Can "It" Happen Again was, No. Policy is secondary; big government itself is the ballast that stabilizes the economy.

And, for the record, it's a massive shame that government spending didn't go up more, reducing unemployment, getting the economy back on track, and ultimately really bringing down the debt-to-GDP ratio.

Mike Konczal is a Fellow at the Roosevelt Institute.

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Till von Wachter: Prevent the Damage of Unemployment Before Workers Get Laid Off

May 24, 2012

In this week’s installment of the Next American Economy breakfast series, Roosevelt Institute Senior Fellow Bo Cutter hosted Columbia economics professor Till von Wachter for a discu

In this week’s installment of the Next American Economy breakfast series, Roosevelt Institute Senior Fellow Bo Cutter hosted Columbia economics professor Till von Wachter for a discussion of the serious damage unemployment can have on workers. Wachter points out that severe job losses during recessions harm not only short-term earnings but also lifetime career earnings, health, family, and even “short- and long-term mortality.” Those laid off during a recession can lose about 20 percent of their earnings over their lifetimes. And “it’s not just middle-aged men in durable goods manufacturing,” Wachter points out. Children of job losers and young people entering a depressed labor market also face grimmer futures. Watch here as Wachter outlines his findings:

All workers, even those who find new jobs relatively quickly, “suffer lasting and substantial adverse consequences from job destruction," he says. The key reason is the loss in human capital. “Workers had skills particular to that employer or that occupation,” so if they have to switch industries they will likely lose those skills and may get stuck in lower wage positions. New workers also face this problem, as their first jobs may be worse and they often become stuck in less attractive career tracks.

But what about “creative destruction"? Does job destruction during recessions have a cleansing effect on the overall economy, as it enables resources to be allocated to more productive enterprises? Wachter's answer: not really. He argues that human and physical resource reallocation occurs predominantly in stronger economic times, not during recessions. So the majority of job destruction is a cost without a benefit. “There’s not much cleansing fire” in recessions, he says.

So what can policy do about all of this? He suggests that given the severe and long-term consequences of lay offs in a recession, policies should focus more on preventing job losses, rather than just ameliorating the short-term effects of unemployment. The idea is to hang on to workers – which is better for them, their employers, and the economy overall.

For more, watch Wachter’s full presentation below:

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