The Time is Right to Create a 21st Century Infrastructure Bank

Feb 20, 2013Georgia Levenson Keohane

President Obama has called for the creation of an infrastructure bank. Congress must follow his lead.

“It's not a bigger government we need,” President Obama said in the State of the Union address, “but a smarter government that sets priorities and invests in broad-based growth.” The creation of a national infrastructure bank is a “smarter government” idea whose time has come.

President Obama has called for the creation of an infrastructure bank. Congress must follow his lead.

“It's not a bigger government we need,” President Obama said in the State of the Union address, “but a smarter government that sets priorities and invests in broad-based growth.” The creation of a national infrastructure bank is a “smarter government” idea whose time has come.

Plans for a national infrastructure bank – one that uses federal funds to incent or leverage even greater investment, public and private, in large-scale public purpose projects – have been percolating since the 1990s. President Obama has long been a champion, and the idea has enjoyed bipartisan support in Congress and backing from the likes of the AFL-CIO and U.S. Chamber of Commerce. Yet we remain stalled in enacting this kind of finance facility, despite the weight of evidence of its potential efficacy and the urgency of the infrastructure (and financing) need. It is time, as the president urged, to put the nation’s interest before party, and to use this kind of public-private partnership to make the investments vital to our economic prosperity.

Arguments in favor of the I-Bank are premised on simple logic. Investments in the infrastructure we require to remain economically competitive – improved roads and bridges, high-speed rail, a new power grid, universal broadband access, renewable energy – will also put people to work. “Smart” use of some of our public dollars via grants, loans, loan guarantees, and other risk-mitigating instruments can encourage or stimulate substantially greater investment in these projects by states, municipalities, and private sector actors. Senators John Kerry, Kay Bailey Hutchison, and Mark Warner estimated that their proposed $10 billion American Infrastructure Financing Authority could unleash an additional $640 billion in infrastructure spending over the course of a decade.

With all this win-win, what explains the delay in actually establishing such a bank? First, given current fiscal constraints, every dollar counts, and even a few budgetary billions that promise significant return on investment may not deliver those returns in this election cycle. Instead, many in Congress prefer to retain prerogative over on what and where investments are made (preferably in their districts) rather than cede allocation decisions to an independent authority. Second, despite the endorsements from pro-business groups like the Chamber of Congress, a number of conservative Republicans have voiced predictable remonstrations: concerns over project selection process (“picking winners”), fear that the investment needs of metropolitan areas will be privileged over those of rural states, and a general (and congenital) preference for state-level decision making.

In fact, states have already taken the lead on creating infrastructure banks, as necessity has bred all kinds of invention. In the U.S., approximately 75 to 85 percent of infrastructure spending is financed by state and local governments, an unsustainable burden for states whose budgets and borrowing capacity have been eviscerated by the global financial crisis. According to the Federal Highway Administration, 32 states have infrastructure banks, and many new entities are taking shape, from Alaska to Virginia. Last year, the New York Works Task Force, headed by Felix Rohatyn (who helped save New York City from bankruptcy in the 1970s) called for the creation of a multibillion-dollar infrastructure bank for the Empire State.

In Chicago, Mayor Rahm Emmanuel, who as President Obama’s chief of staff was actively involved in the White House push for a national infrastructure bank, has created the Chicago Infrastructure Trust (CIT), designed to spur private capital investment in a range of infrastructure projects, including transportation, alternative energy technologies, and telecommunications and broadband access. The CIT will be capitalized by the likes of Citibank and JP Morgan and will fund projects with both debt and equity. The first local I-Bank of its kind, the CIT lies at the heart of Chicago’s new economic growth strategy.

A national infrastructure bank could learn from these local experiments. Private sector investment is not a panacea; it only lends itself to projects that can generate sufficient revenue, often in the form of user fees, like tolls on roads, to attract commercial capital. Sometimes, particularly when municipalities sell off assets, there can be unintended consequences to privatization. In 2008, Chicago Mayor Richard Daley famously leased the city’s parking meters to a private consortium for a handsome up-front fee of $1.15 billion. However, subsequent valuations of the future parking meter revenues put them at approximately $11.6 billion over 75 years – money that will accrue to the private investors, not to the city for things like education, libraries, or transportation.

A number of important new studies draw on these local experiments and best practices from around the world, including those of the European Investment Bank, which was established in 1958 and attracts a wide range of investors. Emilia Istrate and Robert Puentes note that 30 countries have specialized public-private partnership (PPP) units within their governments to promote this kind of cross-sector work. They suggest that, in addition to a national I-Bank, such an office could be housed within the Office of Management and Budget and could support state and local governments with their infrastructure investments. The idea is not to supplant or crowd out state or local investment efforts. As William Galston and Korin Davis point out, a national I-Bank would facilitate regional projects that span multiple states or those that promote goals that are truly national in scope, such as renewable energy development, a seamless power grid, or multimodal freight transport.

This would not be the first time we have looked to public-private partnership for massive infrastructure modernization and job creation. Franklin Delano Roosevelt’s New Deal included public-private ventures like the Tennessee Valley Authority, which FDR described as “a corporation clothed with the power of government but possessed of the flexibility and initiative of a private enterprise.” Obama’s New Deal – Keynes meets leveraged finance – would draw on this tradition of cross-sector collaboration with an eye toward our 21st century economic needs.

Calls for greater infrastructure investment have been amplified in recent months by events like hurricane Sandy, which underscore the urgency – and often regional and national nature – of the need. Polls from Lazard and the Rockefeller Foundation, among others, show that the vast majority of Americans, despite valid privatization concerns, are supportive of a mix of infrastructure finance that includes private sector capital, particularly if it is in lieu of further budget cuts or tax increases. The president and Congress must seize the moment: the time is right for a significant public-private investment in our nation’s future.

Georgia Levenson Keohane is a Fellow at the Roosevelt Institute and the author of Social Entrepreneurship for the 21st Century: Innovation Across the Nonprofit, Private, and Public Sectors.

 

Infrastructure image via Shutterstock.com.

Read more

Share This

The State of the Union: A Good Speech, But a Lost Opportunity

Feb 14, 2013Bo Cutter

President Obama offered up a good list of policies, but there was no clear vision of the future to go with it.

A couple of days ago I wrote an essay in anticipation of President Obama's State of the Union speech. Assuming a "pivot" back to the economy, I defined two kinds of economic speeches he could give: the plain vanilla, commodity speech every president gives, or one that very much anticipated the future. I underlined my own hopes for the second kind of speech.

President Obama offered up a good list of policies, but there was no clear vision of the future to go with it.

A couple of days ago I wrote an essay in anticipation of President Obama's State of the Union speech. Assuming a "pivot" back to the economy, I defined two kinds of economic speeches he could give: the plain vanilla, commodity speech every president gives, or one that very much anticipated the future. I underlined my own hopes for the second kind of speech.

However, Tuesday night's speech was, I would argue, an extremely high-level version of the first type of economic speech. Of course, it was good -- on his worst day ever, President Obama is not capable of giving a bad speech. The specific policies and proposals he put forward were mostly right. He gave important prominence to critical areas such as climate change.

It also has to be said that, once again, President Obama was incredibly lucky in his competition. Senator Rubio, the most recent Republican savior, gave a pedestrian response accompanied by a now-famous swig of water. Senator Rubio comes off as an admirable man, and I had no problem with the water thing, but he's not in the president's league, and you continue to wonder when the Republican Party will come up with a narrative that actually has anything to do with American life. I think our system badly needs a viable Republican "story."

However, classy as the president was, he did not provide that narrative either. This speech did not give a coherent, passionate vision of America today, a vision that would impel movement in the directions he wants.

A few thoughts about the actual policies the president stressed: middle class jobs, the minimum wage, preschool education, infrastructure, manufacturing technology institutes, a market-based climate initiative, and a European Free Trade deal. It's a perfectly good list, and a pragmatic, straightforward case can be made for all of them. Some may actually happen. My sense is that a substantial trade deal with Europe is within reach, and if Europe ever recovers, a deal would add a couple of tenths to our growth rate. Some probably won't happen. I doubt that the national minimum wage will be raised, although I think it would be good for the country if it were. And we aren't going to see the miraculous reemergence of a bipartisan market-based climate approach.

But in the end, it's just a list. The following did not happen with respect to these policies: there were no priorities, there was no sense that we have to make choices, and there was no overall story that makes this set of policies seem to be something we have to do.

This is my core problem with the speech and why it's a lost opportunity. I refer everyone to David Brooks's recent column, "Carpe Diem Nation." His core point is this: "Instead of sacrificing the present for the sake of the future, Americans now sacrifice the future for the sake of the present." He's right, and this should have been the frame of the president's State of the Union speech.

We are confronting enormous change. We have to figure out how to cope with it. We know that this "coping" will cost a lot. But we are spending every marginal dollar on our entitlements. We can and should raise more revenues, but anyone who thinks much more will come out of the income tax by whacking the wealthy again is dreaming. So we have to make choices, but, even more important, some core of America needs to be united around a commonly held story about America and its future.

The hell of it is this isn't that hard. The story is completely obvious and would be bought into by a large number of Americans. The future of our economy is quite positive -- more so than any other developed region of the world. And for us the choices really aren't excruciating. It's just important in our polarized politics for the right and the left to pretend they are. I believe that President Obama could both have begun to build the foundation of a really big legacy and raised the probabilities of his policies becoming real if he had chosen to take the risk of telling the story of America's next chapter.

Roosevelt Institute Senior Fellow Bo Cutter is formerly a managing partner of Warburg Pincus, a major global private equity firm. Recently, he served as the leader of President Obama’s Office of Management and Budget (OMB) transition team. He has also served in senior roles in the White Houses of two Democratic Presidents.

Read more

Share This

Price Point

Signed, Sealed, Diminished: Postal Service Cuts Are Another Blow to the Public Good

Feb 11, 2013Tim Price

Policy choices drove the Postal Service into debt, but we can still choose to save it.

Policy choices drove the Postal Service into debt, but we can still choose to save it.

The news last week that the U.S. Postal Service plans to end Saturday delivery of regular mail provoked a wide range of reactions: anger from those who hope to prevent the cuts, praise from those who see it as a bold and necessary move, sadness from those mourning the end of an era, and denial from lawmakers who noted that it’s not entirely legal. Whatever their take, the fact that nearly everyone has an opinion on this policy shift shows how thoroughly the Postal Service has become woven into the fabric of American society. Many government agencies are facing cutbacks, but few have an influence as personal or as pervasive as the mailbox outside the front door. And when we check that mailbox by force of habit and remember why it’s empty, it may make us think twice about letting yet another pillar of public life in the U.S. be knocked down.

The blame for the Postal Service’s downward spiral is usually split between the Internet (you can’t include a funny video of a cat in a physical letter, so what good is it compared to e-mail?), private competition, and the most usual suspect of all, the United States Congress. The first two have some merit, but Congress, which has lately become the Kevin Bacon of looming disasters, never more than a few degrees removed from a crisis, is the biggest culprit here. In 2006, it imposed a wholly unique mandate that required the USPS to prefund health benefits for future retirees for 75 years, to the tune of about $5.5 billion a year. So far it’s placed $44 billion into that account while running losing about $30 billion. Now it’s planning service cuts that will save about $2 billion a year. You can work out the math on that one, even if our lawmakers can’t.

While contemplating the costs of the Postal Service, it’s also important to consider what we’re paying for. As of 2011, there were 35,119 postal facilities across the country processing 554 million pieces of mail every day. It may not be as polished as FedEx, but then again, FedEx couldn’t be as polished as FedEx without the help of the Postal Service, which delivers 30.4 percent of FedEx Ground shipments thanks to its presence in rural areas where private carriers fear to tread. To do all this, the Postal Service currently has 546,000 career employees, about 20 percent of whom are black. Further layoffs and service cuts will take a significant toll on communities that have already been disproportionately affected by the recession, from economically devastated towns that can’t sustain private carrier routes to minority groups suffering sky-high unemployment.

The USPS also has value beyond the daily churn of correspondence, commerce, and junk mail. Historian Gray Brechin notes that the New Deal’s public works projects included the construction of more than 1,100 post offices “designed…to elevate and inspire the public” and “distinguished by fine architecture, materials and detailing, as well as by a lavish programme of public art that, for the first time, reflected back to patrons and workers their regional identity.” FDR, himself an avid stamp collector, understood the value of public spaces and oversaw the construction of a vast network of facilities that would bind disparate communities together while serving as a vital supply line. It was also meant as a reminder of what Americans can achieve when united by common purpose. And now some people are ready to give up on it because the lines are too long.

In this light, attacks on the Postal Service look like another symptom of the general anti-government sentiment that has been undermining FDR’s legacy and the strength of our public institutions for decades. Like any service, public or private, the USPS should look to trim costs and adapt to customer demands if it can do so without compromising its quality of service or labor standards. But that’s a big “if,” and it’s hard to blame the agency for the fiscal hole it’s in when Congress has opted to micromanage it to death. Indeed, the prefunding mandate that’s driving the USPS into debt is a classic example of the conservative governing philosophy: come in, break stuff, then complain that it never worked in the first place. Some private firm must be able to do it better, even if it depends on publicly funded resources to get it done. And of course the object of their fixation would be postal workers’ future health benefits. As we’ve been taught from the endless attacks on Social Security and Medicare, the essence of greed in the modern workforce is the desire for a comfortable retirement.

We don’t have to let this narrative play out this way. With this and other public services on the chopping block, it’s time for Americans to have a serious debate about what we want from government and what it’s worth to us, in terms of both our budget and our national identity. Through its sheer omnipresence, the Postal Service and the cuts it’s facing may help Americans to grasp the full scope of what we stand to lose if we buy into the mantra that nothing that costs something is worth anything. It’s up to all of us to decide that the mail must go through.

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

Read more

Share This

Rortybomb

Can We Stabilize the Debt with Just $670 Billion in Deficit Reduction?

Feb 11, 2013Mike Konczal

During a radio debate in 1933, the British economist John Maynard Keynes said, “You will never balance the Budget through measures which reduce the national income.” In an attempt to forget this lesson and repeat the mistakes of 1937, the United States is set to put the sequestration into motion in a few weeks. This package of quickly enacted cuts will try to balance the budget by destroying a million jobs in the next two years and taking a chunk of GDP off growth.

President Obama is likely to call for replacing this sequestration with a deficit reduction plan of $1.5 trillion over the next 10 years in his State of the Union tomorrow night. This is as the deficit is falling quickly, from 7 percent of GDP in 2012 to a projected 5.3 percent this year. Obama's target number would build off the $2.4 trillion in deficit reduction already in place through the Budget Control Act and fiscal cliff deal for a total of nearly $4 trillion.

But what if we needed significantly less than $1.5 trillion at this point? What number would be necessary, under what conditions? Richard Kogan of the Center on Budget and Policy Priority (CBPP) has called for $1.4 trillion. There’s been an interesting pushback against this argument from Ethan Pollack of the Economic Policy Institute (EPI), who argues that CBPP’s numbers are far too high, and that the debt-to-GDP, or debt ratio, can be stabilized with less than half of that. Let's summarize this debate here.

If stabilizing the debt is the goal, everything depends on what we mean by stabilization. CBPP wants to stabilize the debt ratio with two conditions. The first is that it will be at the current rate of 73 percent, and the second is that it will occur by 2022, or within a 10-year window. Here is EPI's chart showing the current trajectory and the numbers proposed by CBPP and President Obama:

What Pollack notes is that if you relax either assumption, you can still have stabilization but at a significantly lower level of deficit reduction. If we relax the 73 percent requirement, and we target a debt-to-GDP level that is lower in 2022 than it was in 2018, we’d only need $670 billion dollars in deficit reduction, with $580 coming from policy savings (and the rest from interest). That's a lot less in brutal cuts while the economy is still weak. This would still stabilize the debt, as the debt-to-GDP ratio starts to decline. It would just stabilize it at a higher level.
 
What if we want a debt ratio of 73 percent, but we relax the time constraint? What if we worry less about an arbitrary 10-year limit and look at the long run? If we want to stabilize the debt outside the 10-year window at the current rate, we’d need a long-run deficit of 3 percent. That would only require $500 billion in cuts, of which $430 billion is policy savings. This is still long-run stabilization, which is what we'd want, rather than stabilization while the economy is still weak.
 
So we can have stabilization with significantly less upfront costs. But why focus on a number like this at all? Pollack also argues that this magic number approach is dangerous in two additional ways. A single number losses all the stuff that is important about the actual cuts. Are they phased in only after unemployment is low? Are they from reductions in spending on the automatic stabilizers keeping the economy afloat, like food stamps? Do they include measures that are good for the long-term, like a carbon tax? Like trying to figure out your health by only looking at your weight, using a single number to try and capture a large phenomenon confuses all the things that we know are important.
 
Also having a single number presented this way gives the impression that additional stimulus deployed in the next few years would add to the number. If we need $1.4 trillion in cuts to stabilize the debt over 10 years but want to do an additional $500 billion dollar stimulus in the next two, we don't need $1.9 trillion all of a sudden. Stabilization still takes place, just at a higher level.
 
Jared Bernstein of CBPP responds, arguing that "a) stabilizing at a lower level leaves us less exposed to higher interest payments when rates finally start to rise, and b) it will be a heavier political lift to argue for a cyclical deficits next time we hit a rough patch if we’re starting at 85% versus 73%. "
 
I would note a few things. The first is, for all the theorizing, economists are deeply conflicted about whether or not a higher versus a lower debt-to-GDP level matters. Right now, rather than just crowding out private investments, there will be a strong pull to crowd in actual economic activity. Or, to put it another way, when there’s a fiscal multiplier, increases in debt can help offset themselves; we could end up with a higher debt but a lower debt-to-GDP ratio.
 
Beyond that though, it isn’t clear that the level of debt would impact interest rates or if they would make us richer or poorer, even at full employment. A larger pool of debt at full employment might just increase savings, through a mechanism economists call Ricardian equivalence, which will lower interest rates. There are many different ways of understanding how these relationships could happen. Economists are divided on this; it’s not for nothing that Glenn Hubbard, in 2011, wrote that when it comes to the relationship between government debt and interest rates, "Despite the volume of work, no universal consensus has emerged."
 
We could use more cost-benefit analysis on this matter. Assuming a worst-case scenario that we are currently at full employment, so additional deficits are crowding out private investment, how different would interest rates be if we have an 80 percent debt ratio versus a 73 percent debt ratio? Again this evidence is mixed, but Eric Engen and R. Glenn Hubbard found that a one percent increase in debt-to-GDP increases government interest rates two basis points. So we are talking about the bad case scenario having an 0.16 percent increase in government interest rates. That's not trivial, but it also isn't a doomsday scenario. And this bad case scenario is going to be avoided by prioritizing cuts that could put a serious hamper on both demand and long-term investments? Is this really an exercise worth taking?
 
Follow or contact the Rortybomb blog:
  

 

During a radio debate in 1933, the British economist John Maynard Keynes said, “You will never balance the Budget through measures which reduce the national income.” In an attempt to forget this lesson and repeat the mistakes of 1937, the United States is set to put the sequestration into motion in a few weeks. This package of quickly enacted cuts will try to balance the budget by destroying a million jobs in the next two years and taking a chunk of GDP off growth.

President Obama is likely to call for replacing this sequestration with a deficit reduction plan of $1.5 trillion over the next 10 years in his State of the Union tomorrow night. This is as the deficit is falling quickly, from 7 percent of GDP in 2012 to a projected 5.3 percent this year. Obama's target number would build off the $2.4 trillion in deficit reduction already in place through the Budget Control Act and fiscal cliff deal for a total of nearly $4 trillion.

But what if we needed significantly less than $1.5 trillion at this point? What number would be necessary, under what conditions? Richard Kogan of the Center on Budget and Policy Priority (CBPP) has called for $1.4 trillion. There’s been an interesting pushback against this argument from Ethan Pollack of the Economic Policy Institute (EPI), who argues that CBPP’s numbers are far too high, and that the debt-to-GDP, or debt ratio, can be stabilized with less than half of that. Let's summarize this debate here.

If stabilizing the debt is the goal, everything depends on what we mean by stabilization. CBPP wants to stabilize the debt ratio with two conditions. The first is that it will be at the current rate of 73 percent, and the second is that it will occur by 2022, or within a 10-year window. Here is EPI's chart showing the current trajectory and the numbers proposed by CBPP and President Obama:

What Pollack notes is that if you relax either assumption, you can still have stabilization but at a significantly lower level of deficit reduction. If we relax the 73 percent requirement, and we target a debt-to-GDP level that is lower in 2022 than it was in 2018, we’d only need $670 billion dollars in deficit reduction, with $580 coming from policy savings (and the rest from interest). That's a lot less in brutal cuts while the economy is still weak. This would still stabilize the debt, as the debt-to-GDP ratio starts to decline. It would just stabilize it at a higher level.
 
What if we want a debt ratio of 73 percent, but we relax the time constraint? What if we worry less about an arbitrary 10-year limit and look at the long run? If we want to stabilize the debt outside the 10-year window at the current rate, we’d need a long-run deficit of 3 percent. That would only require $500 billion in cuts, of which $430 billion is policy savings. This is still long-run stabilization, which is what we'd want, rather than stabilization while the economy is still weak.
 
So we can have stabilization with significantly less upfront costs. But why focus on a number like this at all? Pollack also argues that this magic number approach is dangerous in two additional ways. A single number losses all the stuff that is important about the actual cuts. Are they phased in only after unemployment is low? Are they from reductions in spending on the automatic stabilizers keeping the economy afloat, like food stamps? Do they include measures that are good for the long-term, like a carbon tax? Like trying to figure out your health by only looking at your weight, using a single number to try and capture a large phenomenon confuses all the things that we know are important.
 
Also having a single number presented this way gives the impression that additional stimulus deployed in the next few years would add to the number. If we need $1.4 trillion in cuts to stabilize the debt over 10 years but want to do an additional $500 billion dollar stimulus in the next two, we don't need $1.9 trillion all of a sudden. Stabilization still takes place, just at a higher level.
 
Jared Bernstein of CBPP responds, arguing that "a) stabilizing at a lower level leaves us less exposed to higher interest payments when rates finally start to rise, and b) it will be a heavier political lift to argue for a cyclical deficits next time we hit a rough patch if we’re starting at 85% versus 73%. "
 
I would note a few things. The first is, for all the theorizing, economists are deeply conflicted about whether or not a higher versus a lower debt-to-GDP level matters. Right now, rather than just crowding out private investments, there will be a strong pull to crowd in actual economic activity. Or, to put it another way, when there’s a fiscal multiplier, increases in debt can help offset themselves; we could end up with a higher debt but a lower debt-to-GDP ratio.
 
Beyond that though, it isn’t clear that the level of debt would impact interest rates or if they would make us richer or poorer, even at full employment. A larger pool of debt at full employment might just increase savings, through a mechanism economists call Ricardian equivalence, which will lower interest rates. There are many different ways of understanding how these relationships could happen. Economists are divided on this; it’s not for nothing that Glenn Hubbard, in 2011, wrote that when it comes to the relationship between government debt and interest rates, "Despite the volume of work, no universal consensus has emerged."
 
We could use more cost-benefit analysis on this matter. Assuming a worst-case scenario that we are currently at full employment, so additional deficits are crowding out private investment, how different would interest rates be if we have an 80 percent debt ratio versus a 73 percent debt ratio? Again this evidence is mixed, but Eric Engen and R. Glenn Hubbard found that a one percent increase in debt-to-GDP increases government interest rates two basis points. So we are talking about the bad case scenario having an 0.16 percent increase in government interest rates. That's not trivial, but it also isn't a doomsday scenario. And this bad case scenario is going to be avoided by prioritizing cuts that could put a serious hamper on both demand and long-term investments? Is this really an exercise worth taking?
 
Follow or contact the Rortybomb blog:
  

 

Read more

Share This

The Fiscal Cliff Deal: Useless Little Battles and a Worse Government

Feb 7, 2013Bo Cutter

The year ahead will be full of petty budget battles that solve nothing and distract from the real issues.

On the one hand, the last minute December 2012 fiscal cliff deal was in no respects a policy breakthrough, but on the other hand, it didn't solve any process issues either. There will be no grand resolution, which pleases the ideologues on both sides. God forbid that we come to any workable compromises. And there is no framework. So the 2013 stage is set for a series of useless little budget/deficit/debt wars.

The year ahead will be full of petty budget battles that solve nothing and distract from the real issues.

On the one hand, the last minute December 2012 fiscal cliff deal was in no respects a policy breakthrough, but on the other hand, it didn't solve any process issues either. There will be no grand resolution, which pleases the ideologues on both sides. God forbid that we come to any workable compromises. And there is no framework. So the 2013 stage is set for a series of useless little budget/deficit/debt wars.

We face, in turn, (1) the sequestration battles starting in March (over irresponsible cuts we agreed to 15 months ago as a way of avoiding doing anything then), (2) continuing resolution battles starting in April (a series of confrontations over spending this year because Congress couldn't pass spending bills), (3) 2014 budget battles starting in May (but then we haven't actually agreed on a budget for years), and (4) the return of the debt limit debacle sometime around August. (You thought this was over because Congress has declared that the debt limit has been suspended, but it's coming back.)

These little battles will not -- either singly or together -- lead to a resolution of the deficit/debt/budget debacle. No actual problems will be solved. Everything will be kicked down the proverbial road. My bet is that each of the impending possible battles will wind up the same. There will be high drama moving toward farce, forecasts of doom, tense last-minute negotiations in which various congressional and executive leaders will try to act as though something important is happening. Each time the Republican House will back down, because if your approval rating is lower than cockroaches, you have surprisingly little political leverage.

We are seeing this whole drama playing out now in the run up to the sequester. To remind everyone, these are cuts (roughly $85 billion in 2013 divided between domestic and defense programs) Congress and the president agreed to because they were thought to be so awful that the same two parties would agree to solving the whole budget problem to keep these cuts from happening. So now they are likely to happen and we've decided we hate them.

I hated them a year ago and said so at the time, but predicted that we would in the end make the domestic cuts and finesse the defense cuts. To be clear, I believe we must, over a 10 year period, slow down the growth of public debt, and this has to mean budget cuts. But these reductions will occur at the wrong time, they are done in the wrong way, they hit the wrong part of the budget, and they do nothing whatsoever to alter the 10 year picture of debt growth that impends. They are a wholly symbolic and harmful ritual dance.

We should not make these cuts now. We should, if necessary, make smaller cuts so Congress can say it got a "down payment." Then Congress and the president should agree there will be no debt ceiling fight this year and should publicly and together commit to a process that might work.

In my dreams.

We seem intent on having these useless little battles. They will not actually lead to disasters. On the other hand, they won't make anything better. But they will take up time, consume political capital, raise the level of distrust in government, maintain a high level of economic uncertainty, lower our economy's growth rate, and impede the administration's and the Congress's focus on the real issues of our future. Both parties will look worse after all of this.

Roosevelt Institute Senior Fellow Bo Cutter is formerly a managing partner of Warburg Pincus, a major global private equity firm. Recently, he served as the leader of President Obama’s Office of Management and Budget (OMB) transition team. He has also served in senior roles in the White Houses of two Democratic Presidents.

Read more

Share This

Rortybomb

How is Inequality Holding Back the Recovery?

Feb 4, 2013Mike Konczal

Is inequality holding back our weak recovery? Joe Stiglitz argues it is, while Paul Krugman argues it is not. John Judis summarizes the debate at The New Republic. I want to rephrase the question and focus specifically on the two most relevant policy points.

Taxes: Stiglitz argues, "[T]he weakness of the middle class is holding back tax receipts, especially because those at the top are so adroit in avoiding taxes and in getting Washington to give them tax breaks." 
 
Right now our federal government's tax structure is progressive, while state and local taxes are regressive. Meanwhile, the federal government can borrow at cheap rates and run a large deficit without a problem, while state budgets are constrained and need to be balanced. As a result, large cuts and layoffs at the state and local level have counteracted much of the federal government's stimulus that comes from running a larger deficit. Indeed, Stiglitz's point that inequality makes it harder to fund education is a real life battle: we are currently seeing education funding by state and local governments collapsing in real-time.
 
Here's a chart on how regressive state and local taxes are from the Institute on Taxation & Economic Policy:

When it comes to state and local taxes, the top 1 percent pays 6.4 percent, the middle 20 percent pays 9.7, while the poorest 20 percent of families pay 10.9 percent. This isn't counting user fees, though a CEO with 300 times the income of a worker probably doesn't get 300 times as many drivers' licenses.
 
So, all things being equal, less inequality would mean less revenue for the federal government and more for state and local governments. Since a good plan for boosting demand would entail the federal government collecting less revenue (an extension of the payroll tax cut would have boosted demand) and state and local governments collecting more revenue and thus facing less austerity, less inequality would net provide more stimulus. I doubt it would matter that much, though it's an empirical matter on just how much it would provide.
 
Spending: The other debate has to do with the marginal propensity to consume. Evidence does find the rich are less likely to spend money on consumption than everyone else, and in a liquidity trap this matters. Steve Waldman at Interfluidity has a larger theory on why it has mattered over the past decades, but I want to focus on the complicating, narrow issue of wealth inequality.
 
A graph by Amir Sufi, using Federal Reserve data, shows a collapse in the median net worth of households, and his research and others finds that this is a driver of the collapse in demand:

Meanwhile, precautionary savings are still a problem.
 
So, all things being equal, what happens if we decrease inequality in a balance-sheet recession? I see two changes running in opposite directions. You could see an increase in spending by the median household, as they have a higher propensity to spend, plus more income could relieve their balance-sheet constraints. However, if more middle-class households have more of the country's income, they may save it even more aggressively; this would amplify the Paradox of Thrift and make the recession worse in the short term. It's not clear which of these effects would dominate over the other.
 
One way to deal with this is to boost net wealth while keeping incomes consistent, via debt forgiveness or reform our legal mechanisms like bankruptcy so they can handle allocating these losses, though that doesn't seem to be in the cards.
 
Follow or contact the Rortybomb blog:
  

 

Is inequality holding back our weak recovery? Joe Stiglitz argues it is, while Paul Krugman argues it is not. John Judis summarizes the debate at The New Republic. I want to rephrase the question and focus specifically on the two most relevant policy points.

Taxes: Stiglitz argues, "[T]he weakness of the middle class is holding back tax receipts, especially because those at the top are so adroit in avoiding taxes and in getting Washington to give them tax breaks." 
 
Right now our federal government's tax structure is progressive, while state and local taxes are regressive. Meanwhile, the federal government can borrow at cheap rates and run a large deficit without a problem, while state budgets are constrained and need to be balanced. As a result, large cuts and layoffs at the state and local level have counteracted much of the federal government's stimulus that comes from running a larger deficit. Indeed, Stiglitz's point that inequality makes it harder to fund education is a real life battle: we are currently seeing education funding by state and local governments collapsing in real-time.
 
Here's a chart on how regressive state and local taxes are from the Institute on Taxation & Economic Policy:

When it comes to state and local taxes, the top 1 percent pays 6.4 percent, the middle 20 percent pays 9.7, while the poorest 20 percent of families pay 10.9 percent. This isn't counting user fees, though a CEO with 300 times the income of a worker probably doesn't get 300 times as many drivers' licenses.
 
So, all things being equal, less inequality would mean less revenue for the federal government and more for state and local governments. Since a good plan for boosting demand would entail the federal government collecting less revenue (an extension of the payroll tax cut would have boosted demand) and state and local governments collecting more revenue and thus facing less austerity, less inequality would net provide more stimulus. I doubt it would matter that much, though it's an empirical matter on just how much it would provide.
 
Spending: The other debate has to do with the marginal propensity to consume. Evidence does find the rich are less likely to spend money on consumption than everyone else, and in a liquidity trap this matters. Steve Waldman at Interfluidity has a larger theory on why it has mattered over the past decades, but I want to focus on the complicating, narrow issue of wealth inequality.
 
A graph by Amir Sufi, using Federal Reserve data, shows a collapse in the median net worth of households, and his research and others finds that this is a driver of the collapse in demand:

Meanwhile, precautionary savings are still a problem.
 
So, all things being equal, what happens if we decrease inequality in a balance-sheet recession? I see two changes running in opposite directions. You could see an increase in spending by the median household, as they have a higher propensity to spend, plus more income could relieve their balance-sheet constraints. However, if more middle-class households have more of the country's income, they may save it even more aggressively; this would amplify the Paradox of Thrift and make the recession worse in the short term. It's not clear which of these effects would dominate over the other.
 
One way to deal with this is to boost net wealth while keeping incomes consistent, via debt forgiveness or reform our legal mechanisms like bankruptcy so they can handle allocating these losses, though that doesn't seem to be in the cards.
 
Follow or contact the Rortybomb blog:
  

 

Read more

Share This

Rortybomb

Morning Joe vs. the Barbell

Jan 29, 2013Mike Konczal

Paul Krugman was on Morning Joe yesterday, where he was peppered with questions about why he and other liberal economists aren't obsessed with long-term debt as a more pressing, or at least equally pressing, problem compared to mass unemployment. Joe Scarborough wrote a follow-up editorial implying that Krugman's opinion is isolated among economists without citing any actual economists. In response, Joe Weisenthal created a list of economists of varying backgrounds and political persuasions who agree with Krugman.

The segment focused on the idea that the only way to do stimulus is if we also do long-term cuts at the same time.

Some quotes to give a feel:

Joe Scarborough, 8m20s: "Medicare, Medicaid, health care costs, the defense budget, long-term drivers of a long-term debt... I say you can do two things at the same time."

Ed Rendel, 12m23s, 15m49s: "I don't think any of these things are mutually exclusive... I think we can [invest in infrastructure] while at the same time taking care of the long-term... Simpson-Bowles said we can do both. We can stretch out our debt reduction over a course of time and at the same time do some things that will spur the economy."

Joe Scarborough: "Won't that send a good message to the markets if we say, 'Hey listen, here's the deal. We are going to take care of what we have to do in the short term to get people back to work, but in the long term we are taking care of the long-term structure'?"

This is often referred to as a "barbell strategy" (from a Peter Orzag column). Do stimulus, do long-term deficit reduction, but only if you can do them together. As mentioned by the panelists, this is part of several bipartisan debt reduction strategies. Here's Domenici-Rivlin's Restoring America's Future Plan: "First, we must recover from the deep recession that has thrown millions out of work... Second, we must take immediate steps to reduce the unsustainable debt... These two challenges must be addressed at the same time, not sequentially."

It's weird that nobody on Morning Joe seems to understand the obvious problems with this strategy, so let's make a list.

1. There is no solid economic argument for this. There may be political arguments, as in that's the only way to build a coalition to get legislation through a partisan Congress, but they are just that, political. There's no decent economic argument for why if stimulus is a good idea, and long-term deficit reduction is a good idea, that you need to do both at the same time.

Scarborough's argument that "this would send a good message to the markets" implies that interest rates are a constraint, when instead they've been at ultra-low rates. It also seems to imply that additional stimulus would send the markets into a panic. It is true that if we passed a stimulus program interest rates could rise, but this would reflect the market thinking things were getting better, not worse.

2. The political argument for this is also weak, if only because it was the operative strategy over the past several years and didn't work. President Obama just tried to get some $225 billion dollars in stimulus in the fiscal cliff and looked to be willing to accept cuts in the inflation adjustments for Social Security as part of the package. Republicans turned this down. This stimulus was first proposed a year earlier in his American Jobs Act, which, as he told Congress, would be paid for by offsetting long-term budgets. This was dead on arrival.

And it is easy to see why. You can probably get some agreement on the content of a stimulus package, but to get a agreement on long-term deficit reduction, you would need the GOP to accept some new revenues or clarify what it wants on social insurance. It won't do the first outside constructed scenarios like the fiscal cliff and the latter has yet to happen.

3. As for the short term, alleviating unemployment is the most responsible budget action even though it increases the short-term deficit. Austerity is likely to give us a higher debt-to-GDP problem if it causes a double-dip recession. Our current deficit is so large because so many people are not working; more economic activity would mean more things to tax and fewer stablizers like unemployment insurance to pay for.

As Delong and Summers argue, additional fiscal stimulus in a depressed economy can largely offset its own costs. Or as John Maynard Keynes said in 1933, "It is the burden of unemployment and the decline in the national income which are upsetting the Budget. Look after the unemployment, and the Budget will look after itself."

4. As for the part of the budget that won't take care of itself, President Obama fought an ugly and costly battle to bend the cost curve of health care, in which he was accused of everything from creating death panels to looting benefits of seniors in order to pass them out to his army of Takers. Since he's already paid that price, why wouldn't he wait and see how well Medicare cost saving techniques work?

Maybe it's just me, but I find the "if you want to see full employment again, immediately dismantle some social insurance" to be like a form of ransom. Meanwhile millions of people are suffering needlessly as a result of the lack of action.

Follow or contact the Rortybomb blog:

  

Paul Krugman was on Morning Joe yesterday, where he was peppered with questions about why he and other liberal economists aren't obsessed with long-term debt as a more pressing, or at least equally pressing, problem compared to mass unemployment. Joe Scarborough wrote a follow-up editorial implying that Krugman's opinion is isolated among economists without citing any actual economists. In response, Joe Weisenthal created a list of economists of varying backgrounds and political persuasions who agree with Krugman.

The segment focused on the idea that the only way to do stimulus is if we also do long-term cuts at the same time.

Some quotes to give a feel:

Joe Scarborough, 8m20s: "Medicare, Medicaid, health care costs, the defense budget, long-term drivers of a long-term debt... I say you can do two things at the same time."

Ed Rendel, 12m23s, 15m49s: "I don't think any of these things are mutually exclusive... I think we can [invest in infrastructure] while at the same time taking care of the long-term... Simpson-Bowles said we can do both. We can stretch out our debt reduction over a course of time and at the same time do some things that will spur the economy."

Joe Scarborough: "Won't that send a good message to the markets if we say, 'Hey listen, here's the deal. We are going to take care of what we have to do in the short term to get people back to work, but in the long term we are taking care of the long-term structure'?"

This is often referred to as a "barbell strategy" (from a Peter Orzag column). Do stimulus, do long-term deficit reduction, but only if you can do them together. As mentioned by the panelists, this is part of several bipartisan debt reduction strategies. Here's Domenici-Rivlin's Restoring America's Future Plan: "First, we must recover from the deep recession that has thrown millions out of work... Second, we must take immediate steps to reduce the unsustainable debt... These two challenges must be addressed at the same time, not sequentially."

It's weird that nobody on Morning Joe seems to understand the obvious problems with this strategy, so let's make a list.

1. There is no solid economic argument for this. There may be political arguments, as in that's the only way to build a coalition to get legislation through a partisan Congress, but they are just that, political. There's no decent economic argument for why if stimulus is a good idea, and long-term deficit reduction is a good idea, that you need to do both at the same time.

Scarborough's argument that "this would send a good message to the markets" implies that interest rates are a constraint, when instead they've been at ultra-low rates. It also seems to imply that additional stimulus would send the markets into a panic. It is true that if we passed a stimulus program interest rates could rise, but this would reflect the market thinking things were getting better, not worse.

2. The political argument for this is also weak, if only because it was the operative strategy over the past several years and didn't work. President Obama just tried to get some $225 billion dollars in stimulus in the fiscal cliff and looked to be willing to accept cuts in the inflation adjustments for Social Security as part of the package. Republicans turned this down. This stimulus was first proposed a year earlier in his American Jobs Act, which, as he told Congress, would be paid for by offsetting long-term budgets. This was dead on arrival.

And it is easy to see why. You can probably get some agreement on the content of a stimulus package, but to get a agreement on long-term deficit reduction, you would need the GOP to accept some new revenues or clarify what it wants on social insurance. It won't do the first outside constructed scenarios like the fiscal cliff and the latter has yet to happen.

3. As for the short term, alleviating unemployment is the most responsible budget action even though it increases the short-term deficit. Austerity is likely to give us a higher debt-to-GDP problem if it causes a double-dip recession. Our current deficit is so large because so many people are not working; more economic activity would mean more things to tax and fewer stablizers like unemployment insurance to pay for.

As Delong and Summers argue, additional fiscal stimulus in a depressed economy can largely offset its own costs. Or as John Maynard Keynes said in 1933, "It is the burden of unemployment and the decline in the national income which are upsetting the Budget. Look after the unemployment, and the Budget will look after itself."

4. As for the part of the budget that won't take care of itself, President Obama fought an ugly and costly battle to bend the cost curve of health care, in which he was accused of everything from creating death panels to looting benefits of seniors in order to pass them out to his army of Takers. Since he's already paid that price, why wouldn't he wait and see how well Medicare cost saving techniques work?

Maybe it's just me, but I find the "if you want to see full employment again, immediately dismantle some social insurance" to be like a form of ransom. Meanwhile millions of people are suffering needlessly as a result of the lack of action.

Follow or contact the Rortybomb blog:

  
Read more

Share This

Rortybomb

No, the 90 Percent Debt Threshold Hasn't Been Proven

Jan 28, 2013Mike Konczal

The deficit hawks at the Washington Post editorial board are worried. They are worried that the deficit is falling and the debt-to-GDP ratio is leveling off as a result of the numerous cuts and tax increases implemented over the past two years. Liberals know this and are starting to push back, either claiming that the deficit is coming down too quickly or arguing that the main medium-term deficit issues are taken care of and we should focus more on unemployment and other non-budget issues while implementing Obamacare reforms well. The CBPP has been leading the charge on this, noting various levels at which debt as a percent of GDP would level off in the following graphic:

The editorial focuses on the debt-to-GDP ratio leveling out too close to a 90 percent threshold. The writers also claim that there is a well-defined and well-established 90 percent threshold over which our economy will suffer. They write, "The CBPP analysis assumes steady economic growth and no war. If that’s even slightly off, debt-to-GDP could keep rising — and stick dangerously near the 90 percent mark that economists regard as a threat to sustainable economic growth." This 90 percent threshold was proposed by Carmen Reinhart and Kenneth Rogoff in their 2010 article "Growth in a Time of Debt" (GITD). They found that economies with public debt over 90 percent of debt-to-GDP grew more slowly than other countries.

It's always tough to figure out where consensus among economists lies. But economists don't "regard" the 90 percent mark as definitive; in fact, this study and its claim have never even been peer reviewed by an economics journal. [1]

I don't bring this up because something that's peer reviewed should automatically be accepted as definitive, or that credentials are everything, or that only Very Serious Economics matter. (That's a bad rule in general, and as an economics blogger that would be a doubly insane claim.) I bring it up only because the public should understand that the 90 percent threshold couldn't survive peer review for a very important reason: It's impossible to seperate the cause and effect here given the evidence collected. Policymakers and deficit hawks should reconsider if they're running under the assumption that this is a well-established rule.

Remember that growth that is suprisingly slow will increase the debt-to-GDP ratio relative to expectations by definition. And periods of slower growth will lead to higher debt levels. That doesn't mean that those debt loads caused the slower growth -- in these cases it would be just the opposite. Reinhart and Rogoff present no techniques, tools or theory to break this problem down and determine what is the cause and what is the effect in this debt versus GDP relationship.

As John Irons and Josh Bivens of EPI noted in their review of the GITD paper (my bold):

First, the theory that governs the relation between debt and growth suggests strongly that causality runs more firmly from slower growth to higher debt loads. Slow economic growth, and especially growth that is slower than policy makers’ expectations, will lead to higher levels of debt as revenues fall and as automatic-stabilizer spending increases... Importantly, the timing matters. Persistent slow growth will yield high debt levels, and will thus mechanically yield to contemporaneous combinations of high debt and slow growth...

In short, the statistical evidence strongly suggests that the causality runs from growth to debt, and not the reverse. Given that theory and preliminary investigation agree in this case, it seems clear that the GITD analysis—which looks only at contemporaneous levels of debt and growth—is much more likely to capture causal relationships running from slow growth to high debt. This means there is very little reason for policy makers to think that there is a high-debt threshold that acts to slow growth.

As one economist wrote me in an email, "it is likely unpublishable in a top journal due to the fact that they have not developed any techniques to tease out causality in what are suggestive but non-conclusive correlations. For this work to be the *one* thing that politicians decide to take from economics is horrible."

You can think that lower debt is better than higher debt ratios. You can be worried about interest payments, even though those are at a 30-year low and projected to go back to historical averages. But there isn't a great reason to believe that that leveling out at 80 versus 90 percent of GDP matters that much when we have mass unemployment, low interest rates, and inflation in check. Growth matters just as much as GDP for this calculation, and it's a terrible deal if we sacrifice either immediate growth or long-term investments in an attempt to bring down this debt-to-GDP ratio. There isn't good evidence that the levels matter that much if the plan works, and it is likely the plan won't work. Weakening growth is likely to balloon that deficit as well.

It's important to get a sense of where the deficit hawks will focus next because, if it is true that the deficit wars are coming to an end, all those giant deficit hawk groups are still funded through the apocalypse. Their mission will be that of Peter Venkman in Ghostbusters: "Type something, will you? We're paying for this stuff." How will they keep busy and justify their taxpayer-subsidized funding? We may have just gotten an important glimpse.

[1] According to their C.V.s, it's been published in the May 2010 issue of the American Economic Review, which is a special non-reviewed "papers and proceedings" issue.

Follow or contact the Rortybomb blog:

  

The deficit hawks at the Washington Post editorial board are worried. They are worried that the deficit is falling and the debt-to-GDP ratio is leveling off as a result of the numerous cuts and tax increases implemented over the past two years. Liberals know this and are starting to push back, either claiming that the deficit is coming down too quickly or arguing that the main medium-term deficit issues are taken care of and we should focus more on unemployment and other non-budget issues while implementing Obamacare reforms well. The CBPP has been leading the charge on this, noting various levels at which debt as a percent of GDP would level off in the following graphic:

The editorial focuses on the debt-to-GDP ratio leveling out too close to a 90 percent threshold. The writers also claim that there is a well-defined and well-established 90 percent threshold over which our economy will suffer. They write, "The CBPP analysis assumes steady economic growth and no war. If that’s even slightly off, debt-to-GDP could keep rising — and stick dangerously near the 90 percent mark that economists regard as a threat to sustainable economic growth." This 90 percent threshold was proposed by Carmen Reinhart and Kenneth Rogoff in their 2010 article "Growth in a Time of Debt" (GITD). They found that economies with public debt over 90 percent of debt-to-GDP grew more slowly than other countries.

It's always tough to figure out where consensus among economists lies. But economists don't "regard" the 90 percent mark as definitive; in fact, this study and its claim have never even been peer reviewed by an economics journal. [1]

I don't bring this up because something that's peer reviewed should automatically be accepted as definitive, or that credentials are everything, or that only Very Serious Economics matter. (That's a bad rule in general, and as an economics blogger that would be a doubly insane claim.) I bring it up only because the public should understand that the 90 percent threshold couldn't survive peer review for a very important reason: It's impossible to seperate the cause and effect here given the evidence collected. Policymakers and deficit hawks should reconsider if they're running under the assumption that this is a well-established rule.

Remember that growth that is suprisingly slow will increase the debt-to-GDP ratio relative to expectations by definition. And periods of slower growth will lead to higher debt levels. That doesn't mean that those debt loads caused the slower growth -- in these cases it would be just the opposite. Reinhart and Rogoff present no techniques, tools or theory to break this problem down and determine what is the cause and what is the effect in this debt versus GDP relationship.

As John Irons and Josh Bivens of EPI noted in their review of the GITD paper (my bold):

First, the theory that governs the relation between debt and growth suggests strongly that causality runs more firmly from slower growth to higher debt loads. Slow economic growth, and especially growth that is slower than policy makers’ expectations, will lead to higher levels of debt as revenues fall and as automatic-stabilizer spending increases... Importantly, the timing matters. Persistent slow growth will yield high debt levels, and will thus mechanically yield to contemporaneous combinations of high debt and slow growth...

In short, the statistical evidence strongly suggests that the causality runs from growth to debt, and not the reverse. Given that theory and preliminary investigation agree in this case, it seems clear that the GITD analysis—which looks only at contemporaneous levels of debt and growth—is much more likely to capture causal relationships running from slow growth to high debt. This means there is very little reason for policy makers to think that there is a high-debt threshold that acts to slow growth.

As one economist wrote me in an email, "it is likely unpublishable in a top journal due to the fact that they have not developed any techniques to tease out causality in what are suggestive but non-conclusive correlations. For this work to be the *one* thing that politicians decide to take from economics is horrible."

You can think that lower debt is better than higher debt ratios. You can be worried about interest payments, even though those are at a 30-year low and projected to go back to historical averages. But there isn't a great reason to believe that that leveling out at 80 versus 90 percent of GDP matters that much when we have mass unemployment, low interest rates, and inflation in check. Growth matters just as much as GDP for this calculation, and it's a terrible deal if we sacrifice either immediate growth or long-term investments in an attempt to bring down this debt-to-GDP ratio. There isn't good evidence that the levels matter that much if the plan works, and it is likely the plan won't work. Weakening growth is likely to balloon that deficit as well.

It's important to get a sense of where the deficit hawks will focus next because, if it is true that the deficit wars are coming to an end, all those giant deficit hawk groups are still funded through the apocalypse. Their mission will be that of Peter Venkman in Ghostbusters: "Type something, will you? We're paying for this stuff." How will they keep busy and justify their taxpayer-subsidized funding? We may have just gotten an important glimpse.

[1] According to their C.V.s, it's been published in the May 2010 issue of the American Economic Review, which is a special non-reviewed "papers and proceedings" issue.

Follow or contact the Rortybomb blog:

  
Read more

Share This

Price Point

No Pay, No Problem: Why Congress Doesn't Need Our Money

Jan 25, 2013Tim Price

One reason Congress is so dysfunctional is that wealthy lawmakers are insulated from everyday concerns like getting paid.

One reason Congress is so dysfunctional is that wealthy lawmakers are insulated from everyday concerns like getting paid.

This week, as part of a compromise to ward off a debt ceiling showdown and potential default, the House approved the No Budget, No Pay Act, which would withhold lawmakers’ paychecks starting April 15 unless they pass a budget. If you haven’t been keeping up with GOP talking points, this is the latest attempt to pressure Senate Democrats into producing a budget resolution, which they haven’t done in the last four years for various inane parliamentary reasons. But whatever you think of its intent, it’s an empty gesture and one that highlights the troubling disconnect between average Americans and their elected officials.

Despite its gimmicky origins, No Budget, No Pay has a certain intuitive appeal. As centrist commentator John Avlon writes, “If you don't get the job done at work, you won't get paid.” Sure, you or I would probably just get fired, but we don’t have gerrymandering to save us. Still, why should we reward Harry Reid and his crew for shirking their responsibilities while House Republicans have been keeping their noses to the grindstone and dutifully passing Paul Ryan’s Ayn Rand fan fiction?

For one thing, it’s unconstitutional. Not “unconstitutional” in the wingnut sense that cutting the crusts off your sandwich is unconstitutional if there’s a photo of Barack Obama doing it, but unconstitutional in the sense that the 27th Amendment specifically prohibits Congress from mucking around with its own pay unless there’s an intervening election. To get around this little detail, the act is designed so that the members’ checks get deposited into an escrow account until a) they pass a budget or b) the term ends in 2014, at which point they get paid in full either way. In other words, it’s less of a threat to their livelihood and more of an experiment in delayed gratification.

But a more significant problem is that most legislators probably couldn’t care less if their pay was withheld indefinitely. As of 2011, the average estimated wealth of members of Congress was $6.5 million in the House and $13.9 million in the Senate. And unlike many of their constituents, they haven’t exactly been struggling through lean times recently. While average American households saw their median net worth drop 39 percent from 2007 to 2010, lawmakers’ rose 5 percent during the same period. That’s not to say that every member of Congress is set for life; some are deep in debt like true red-blooded Americans. But threats to withhold pay are ineffective when most of our representatives have enough money in their rainy day funds to last them through monsoon season. And if worst comes to worst, they can always exit through the revolving door and join a few corporate boards to replenish their bank accounts.

This points to a larger problem with our political system, which is just how far removed our policymakers are from the lives and concerns of ordinary Americans. In a 2005 study, Princeton political scientist Larry Bartels found that:

[S]enators appear to be considerably more responsive to the opinions of affluent constituents than to the opinions of middle-class constituents, while the opinions of constituents in the bottom third of the income distribution have no apparent statistical effect on their senators’ roll call votes.

Read that again: if you’re a low-income voter, you and your policy preferences might as well not exist as far as your senators are concerned. While Bartels doesn’t provide a definitive explanation for these findings, he notes that “the fact that senators are themselves affluent, and in many cases extremely wealthy, hardly seems irrelevant.” Being rich frames the way our elected officials see the world, shapes their social circles, and determines their legislative priorities. In that sense, wealth is the incubator that hatches Washington’s deficit hawks.

Of course, wealth alone doesn’t determine a person’s politics. FDR was no pauper, but he fought for the common good and was labeled a class traitor for his efforts. But noblesse oblige isn’t what it used to be, and today’s well-heeled lawmakers seem more interested in scoring political points than addressing mass unemployment and soaring inequality. No Budget, No Pay won’t do anything to change that, and any consensus budget that it did produce would undoubtedly be laden with more unnecessary cuts to domestic spending and the social safety net. It’s a fair point that lawmakers shouldn’t get paid for a job they’re not doing, but they’re so insulated from reality that no amount of negative reinforcement short of voting them out of office is likely to have a significant impact. And until that happens, we don’t need more gimmicks to make them fall in line and pass an austerity budget. What we could use is a lot more traitors.

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

Read more

Share This

Rediscovering Government

Obama's Other Message: Times Change and Government Changes With Them

Jan 23, 2013Jeff Madrick

The president didn't just make a case for big government; he argued that the government must adapt to meet its citizens' needs.

The president didn't just make a case for big government; he argued that the government must adapt to meet its citizens' needs.

Almost hidden in President Obama’s second inaugural address was a key idea that received little if any attention. The focus has been on the president's eloquent defense of collective government, and who couldn't be gratified by that? Time and again, he used the world “together” to describe the nation’s purpose. Government is about working together, and Obama very nicely made the case for it in the face of 40 years of pronouncements by those who disparage government and want to cut it down, if not out. Democrats, not just Republicans, have been leaders in this quest.

But for me, what was most interesting about Obama’s speech was the emphasis on how we must change with the times. I was interested because I wrote a book about this. I take no credit for Obama’s point, because my book was titled The Case for Big Government. I doubt he would be caught even in the privacy of his own bedroom reading a book with that title.

Seeing the title, many presumed I was writing about Keynesian policy. In fact, my argument was that the size of government is not the issue, the need for government is. I cited the work of economists who show that size and high taxes have not automatically deterred growth. But when I published this before the crash, Republicans in particular, but also some Democrats, kept talking about the original intentions of the Founders and were urging us not to go beyond the early purposes of government. That is where I focused my attention: the needs of government change as society, science, social thought,  technology, and expectations advance.

To say government must be small is nonsense. Government must be the size necessary to make a society and economy work, and that is not fixed -- nor could it possibly have been known by farmers in the late 1700s.

Here is what Obama said about change on Monday:

[W]e have always understood that when times change, so must we, that fidelity to our founding principles requires new responses to new challenges, that preserving our individual freedoms ultimately requires collective action. For the American people can no more meet the demands of today's world by acting alone than American soldiers could have met the forces of fascism or communism with muskets and militias.

Let me reemphasize that this has been said before but not often enough. Surely it is not part of the media discourse and it is not part of the thinking of those budget writers in Washington who claim the federal government should be a fixed proportion of GDP. I refer of course to the Bowles-Simpson budget balancing plan that so many think is the height of good sense. They’d like to limit federal spending to 21 percent of GDP -- no matter that our society ages, that health care is more costly, that we need to educate preschool children and better educate those in higher grades as the world gets more competitive, that our poverty rate is still high, that our ability to create jobs is under severe challenge, and so on.  

There are no fixed rules for what government should do because we can’t anticipate the future. The colonial writers of America’s Constitution did not know we’d need high schools or highways, electricity or polio vaccines, MRI machines or antibiotics, fertilizers or pollution restraints, gasoline or wind power, or computer chips. They didn’t even know we’d need railroads.

Our view of human rights also changes. Slavery is now abhorrent to almost all, women are equal, those with birth defects require help, and very young children, we have learned, benefit greatly from educationally nourishing environments.

Most of this requires government, and President Obama recognizes this. His agenda, what we must now do “together,” includes climate change, equal rights for women and gays, gun control, and a sensible international policy for the times. He goes on, “So we must harness new ideas and technology to remake our government, revamp our tax code, reform our schools, and empower our citizens with the skills they need to work hard or learn more, reach higher. But while the means will change, our purpose endures.”

The means will indeed change, and the nation would do well to accept that truth, or it will not rise to the challenges of this new century. I originally titled my book The Purpose of Government. Maybe that would have been better. But the point remains the same. Shed ideology about government and fixed ideas and turn our attention to what must be done. Yes, my guess is it would mean bigger government. But so what?

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

Read more

Share This

Pages