Normative Narratives


Leave a comment

Starved of New Ideas, the GOP Goes Back to “Starve The Beast”

“Starve the Beast”

The GOPs tax plan was the first part of a two-tiered approach to reduce the size of the government–it was never supposed to “pay for itself“. In order to keep the deficit from growing after cutting taxes, spending cuts–with “welfare” the common whipping boy–are necessary, or so the thinking goes. This method of governance, developed by the Republicans in the late 70s and 80s, is known as “starve the beast“.

History tells us that “starve the beast” does not work–it is a tried and failed policy. It turns out that when you get down to the actual programs involved, “welfare” is quite popular; it aligns with America’s collective moral compass, helps promote the “American Dream” (social mobility), and stimulates short-term economic growth. While there are reforms that could improve our welfare system, doing so responsibly requires complementary policies (more on this later).

There are again signs that the GOP will fail to fully implement its “starve the beast” agenda. The tax code is already the law of the land, yet the GOP does not seem to have the political will to tackle welfare reform. Far from starving the beast, Congress has just agreed on a budget deal that will increase spending by $300 billion dollars over the next two years.

I’m sure the GOP will come back to entitlement reform and overall government downsizing after the 2018 midterm elections. At this point the GOP will no longer have to worry about immediate electoral backslash from enacting unpopular welfare reforms, and probably believes the link between their tax cuts and the fiscal need to enact such reforms will have been severed in the average voters mind. But even when the political will to “starve the beast” resurfaces, I doubt the GOP will have sufficient Congressional support to actually implement the plan. Whether they have sufficient support will largely depend on the outcome of the 2018 elections–after all, “elections have consequences”.

Make no mistake, the likelihood that “starve the beast” will again fail is a good thing. The real crime is that the GOP passed a huge tax cut knowing it would not pay for itself, while also knowing that it would not be able to “starve the beast”. The results are ballooning deficits and insufficient resources to address America’s many needs. Sure, budgets may pass with small increases to existing programs, but new programs will not even be considered in this climate of huge (and increasing) national debt, rising interest rates on said debt, and much lower tax receipts.

Perhaps this is the true purpose of “starve the beast”–to restrict our country’s collective “policy imagination” (i.e. “fiscal space“). Instead of thinking about how to make America better, we will be stuck with the status-quo that people across the political spectrum are unhappy with (only now with even more inequality and debt).

Common Sense Welfare Reform

As mentioned before, there are some worthwhile welfare reforms to consider. Let’s look at a few of them, as well as the complementary policies needed to ensure they actually promote desirable results and don’t just place undue burden on America’s most vulnerable people.

SNAP

Let’s promote a healthy diet and save on our country’s medical spending! Why not go one step further and promote local produce wherever possible. Such a plan would benefit smaller farmers and local economies, promote greater public health, and reduce emissions from shipping food around the world.

Drug Testing for Welfare

I am not completely against drug testing people on welfare programs, or other oversight measures, but let’s be clear–such measures would require more spending to implement. It is entirely possible that the nation would spend more money on enforcement than it would save in rooting out welfare fraud–this has largely been the experience when states have experimented with such programs.

But money isn’t everything; in a democracy public support is the lifeblood of any policy, and clearly many people do not approve of our current welfare system. Surely even the most progressive person can see there is some benefit to addressing the concerns of a large portion of the electorate regarding our current welfare system. Addressing these concerns should ultimately increase public support for welfare programs.

The costs and benefits (monetary and otherwise) of various oversight measures are something we should study, so the American people can make an informed decision about whether such policies are truly worth pursuing.

Responsibly Reforming Welfare Programs

How else can we responsibly reform our welfare system, reduce disincentives to work, and promote gainful employment?

First of all, programs that benefit children, the non-wealthy elderly, persons with disabilities (including serious mental illnesses), and other vulnerable groups do not need more requirements–society’s most vulnerable do not need more hoops to jump through. Admittedly, just coming to an agreement on who should be considered ”able-bodied” is a difficult task itself.

But certain recipients, like healthy, prime working age people, can be reasonably expected to meet certain socially beneficial criteria in exchange for welfare benefits. One such example is a new “community engagement” requirement for Medicaid in Kentucky. Progressives may not like this plan, but as long as sufficient waivers exist for vulnerable groups, why should someone in the prime of their life not be working, looking for work, volunteering, and/or in a job training program for 80 hours a month? Such a change should lead to improved employability and mental health outcomes. This is a completely reasonable requirement, and the type of idea that responsible, bipartisan welfare reform can be built upon—leveraging welfare benefits to drive positive recipient behavior.

Aside from reforming welfare programs, other complementary programs targeting the labor market could help reduce reliance on government assistance. Higher minimum wages would reduce government spending on welfare programs, as we currently subsidize companies that do not pay a living wage. An expanded earned income tax credit (EITC) could help reduce disincentives to work by smoothing high marginal tax rates for people coming off welfare programs. We also need more job training and apprenticeship programs; we can’t just say there are job training requirements for welfare eligibility, but then not make these programs available! Just like with welfare oversight measures, expanding the EITC and sufficiently scaling up job training programs would both require significant government resources.

Simply put, there are upfront costs to responsibly reforming our welfare system. Unilaterally cutting welfare programs and hoping for the best will not work; any savings would ultimately be lost due to increased spending on the criminal justice system and decreased long term economic growth, as even more Americans would fail to reach their full economic potential.

Ideally, reducing the size of the “welfare state” would be an organic process by which we invest enough in our people, particularly early in life, to promote equality of opportunity. The complementary policies outlined above can help at the margins, but the real heavy lifting involves addressing the root developmental causes of poverty (early childhood development, housing, healthcare, education, etc.).

Progress Frozen in Time

This brings me to the main reason why the new tax plan is so regressive in the first place. It is not because it will be bad for the average American consumer or economic growth in the short-run; if anything, it should have positive short-term impacts in those regards. Those are, however, poor criteria for assessing the merits of a tax plan that will likely be in place for a long time and is directly related to our ability to fund programs that drive long term growth and social progress. In other words, what did we give up in exchange for these tax cuts?

Due to lower tax revenue, it will be very difficult to fund the aforementioned complementary programs needed to responsibly reform our welfare system, much less the more costly investments needed to promote equality of opportunity and drive long term economic growth (infrastructure, R&D, healthcare, education, job training and early childhood development).

On the topic of infrastructure, Trump’s “trillion dollar infrastructure plan” (now $1.7 trillion, if you still believe a word he says), will reportedly only use $200 billion in federal funds. The idea that $200 billion can leverage that much funding in mostly state and local tax money (as well as some private investment)–the crux of Trump’s plan–was a dubious claim when he made it while campaigning. With the caps on SALT deductions in the new tax code, and the resulting strain on state and local budgets, it can’t even be called wishful thinking–it is just a flat-out lie.

The results will be obvious in the type of infrastructure that ends up being built. Non-revenue producing infrastructure will fall almost completely to the wayside. There will not be enough funding for expanding broadband internet access and affordability in underserved areas, which would unlock better K-12 schooling and access to online job postings. In a sad irony, these underserved areas are mostly in “Trump country”.

EPA Chief Scott Pruitt has said combating lead poisoning is a top priority of his, but has offered no plan for how he will do it. Instead, he has undermined programs that protect children from lead based paint, and supported an overall downsizing of the EPA. In all likelihood there will not be enough funding for new water pipes to prevent people from getting lead poisoning, which stunts cognitive development in children. Stunted development compromises the future earning potential of those affected, increasing reliance on welfare programs–talk about being short-sighted.

Our country likely needed more tax revenue, not less, to promote equality of opportunity, meritocracy and social mobility–to make America fair again. People–albeit the minority of the electorate–elected Trump as a populist because they felt like they were being left behind. Trump has betrayed his base with his policies, whether they realize it yet or not.

The Same Old Blame Game

Absent the resources to actually address the needs of the average American, you will instead hear the GOP repeat its same old tired lines. Lets consider some of these talking points:

People are lazy

Well sure some are, but no more-so than they used to be…

It is true that labor force participation rates are down overall from highs in the 1990s, but this is less true among prime working-age people; the majority of labor force participation decline is due to an aging population.

Furthermore, many people collecting government assistance already work. As stated before, increasing the minimum wage and expanding the EITC would help promote gainful employment.

Traditional marriages / family structures / “values” are breaking down

This is really a societal shift, and in some ways is a natural consequence of a freer society. For example, a wife who is being beaten can more easily leave her husband now than she could decades ago.

This phenomenon is at the cross-section of many deeply personal, multifaceted, and interrelated choices people make (to get married or not, to have kids or not, to get divorced or not). As such, there is really very little the government can do to steer society back towards more traditional family structures. The common conservative call to block access to family planning services, contraception, and abortion, however, will only exacerbate these issues (and yes, likely lead to increased future welfare spending).

We Can Rely on the Private Sector to Fix Everything

Guess what, the private sector won’t just deliver on infrastructure, but job training too! Trickle-down economics! That sure sounds nice, too bad it has never actually worked out that way.

I listened to an event kicking off “National Apprenticeship Week” at the Department of Labor, and not once was government funding or a public-private partnership (PPP) mentioned. It was all about what the private sector can do; well guess what, the aren’t doing it! Absent some change in incentives, there is little reason to think that the private sector will all of a sudden start to prioritize job training programs. What America needs is drastically scaled-up apprenticeship programs developed and financed by community colleges, universities, and industry leaders.

Instead, “Jobs President” Trump has proposed cutting the DOL budget by 21% (from $12.1 billion to $9.6 billion), and the Department of Education budget by 13.5% (from $69.4 billion to $60 billion). Such a plan effectively rules out more funding for apprenticeships, as these would be the departments to administer such programs.

At the same time, the GOP will increase military spending by $82 billion, to $716 billion, by 2019. Imagine the impact that type of additional funding would have on our drastically underfunded job training programs and community colleges.

Hail the Almighty Job Creators! 

We need to stop treating companies as if they are doing some sort of public service by hiring people. Companies create jobs to maximize profits. Publicly traded companies operate to maximize stock prices. Private companies are not doing a public service by being in business.

A company’s social contributions are the taxes they pay. We should not be subsidizing jobs through direct subsidies to companies and unlivable minimum wages that drive people to welfare programs. We should not have reduced the tax burden of the wealthiest Americans in the hope that some scraps will trickle down to the average person. Absent such policies the American economy would still work, just with less extreme inequality.

Until there is a clear understanding on this across the political spectrum, the greedy will continue to use scare tactics to hold enough of the electorate hostage to perpetuate their position of power. We need politicians that will stand up to these people and call their bluffs, not politicians who will sell the American public out to the highest bidder.

Concluding Thoughts

Investing in human development takes time to manifest itself in positive outcomes, just as it takes time for a child to grow up. Therefore a responsible, holistic approach to welfare reform means there will be an overlap period where we will be paying more for both welfare reform and human development initiatives (which in some cases, like CHIP, are one in the same).

If, as a country, we are OK with $1 trillion more in debt (what Trump’s tax plan will cost us), this is the way to spend it—not another war or military buildup, not another trickle-down Hail Mary, but a real plan to promote economic opportunity and responsibly reform our welfare system. This new “Great Society”, with the benefit of 50+ years of lessons learned, could build upon the successes and avoid the shortcomings of the original, and ultimately make America greater than it ever has been.

Instead we are stuck with half a “starve the beast” strategy. This means more debt while cementing in place the status-quo that has failed too many Americans for too long. Thanks, GOP!

Advertisements


2 Comments

Trump’s Strategy: Possible Short-Term Gains, Definite Long-Term Pains

Image result for trumps long term damage

There is always a lag between when a policy is enacted and when its true long-term consequences are felt. This reality often works against societal wellbeing, as politicians pursue policies that are damaging in the long-run if they make them more popular here and now.

This shortsighted behavior is reinforced by the electorate. The combination of more pressing issues in their own lives, imperfect memory, and a lack of technical knowledge result in the voters not holding politicians accountable for the long-term consequences of their policies. When things come crashing down on someone else’s watch they are considered the fault of the person currently in charge, regardless of the root cause. One does not have to look far back to find two prime examples–President Obama inheriting the Great Recession and the turmoil in the Middle East.

The most obvious example of President-elect Trump’s shortsightedness is his stance on Climate Change. Trump has called Climate Change a hoax. He has stated he wants to overturn Obama’s signature environmental policy, the Clean Power Plan, which is also central to meeting America’s commitments under the Paris Climate Accord (the 194 nation pact covering all major emitters, which Trump has vowed to drop out of). His pick to lead the Environmental Protection Agency, Scott Pruitt, is a climate change skeptic–the fox is guarding the hen house.

Leasing public lands to private companies seems cartoonishly short-sighted. In the most extreme scenario, imagine a National Park being turned into a natural gas field, depriving future generations of its beauty. Unfortunately, this may be what the G.O.P is planning.

Trump’s War on Climate Change toolkit also features intimidation. His Department of Energy transition team asked the DoE for a list of employees who work on climate change related issues, to which one employee (who declined to comment for fear of reprisal) remarked “This feels like the first draft of an eventual political enemies list.” The DoE, for it’s part, has rebuffed the request, but who knows what will happen once Rick Perry is running the show. As a self-proclaimed “jobs President”, Trump should not do anything that could compromise America’s position as a leader in the emerging clean energy economy (a position coveted by a country Trump has promised to be tough on–China).

While environmental considerations are the most obvious example, they are far from the only shortsighted policies Trump has embraced. If he does not change his campaign promises, his fiscal and national security policies will prove equally as shortsighted.

Trumped-Up Trickle-Down Economics

While damaging in the long-run, Trump’s policies will not necessarily lead to an immediate recession, a point made in a recent article by Paul Krugman. As Krugman points out, even poorly designed fiscal stimulus has a positive impact on short-run growth.

Even if Trump’s policies do result in short-run growth, this does not mean the average American will benefit. In fact, if recent history is any indicator, Trump’s reliance on trickle-down economics to improve the lives of average Americans is all but sure to fail. If wages continue to stagnate (Trump’s nominee for Secretary of Labor has opposed anything resembling a livable minimum wage or expanding overtime pay), or if consumer prices rise dramatically due to Trump’s inflationary fiscal and protectionist trade policies, people may well feel the pain sooner rather than later.

Perhaps Trump, in all his deal-making brilliance, can buck the lessons of recent history and somehow make trickle-down economics work–I am highly skeptical. Even if he can, there are still the long-term ramifications of his economic agenda, which would outweigh any immediate benefits.

By greatly increasing the deficit—a certainty if his economic vision is implemented–Trump is pursuing the tried and failed “starve the beast” strategy. “Starve the beast” is a political strategy to cut taxes to deprive the federal government of revenue, in a deliberate effort to force it to reduce future spending.

Starving the beast is very dangerous; reducing “fiscal space” compromises the Government’s ability to respond to future economic downturns with stimulus spending to offset lower private sector demand. It also does not work–critical, broadly popular programs end up being financed through increased deficit spending. When push comes to shove, politicians will not risk losing support and widespread social instability in the name of fiscal responsibility.

But starving the beast can lead to underinvestment in certain areas by artificially creating a budgetary squeeze. Public R&D and investments in human capital development / productivity improvement are generally not considered “critical”, in that there are no immediate consequences for cutting them. Therefore, when budgets are tight, these are often the first programs on the chopping block. Such cuts erode America’s innovative capacity, compromising long-term economic growth.

National Security: Syria, the Islamic State and Beyond

No one knows exactly what course of action Trump will ultimately take with Syria, but we can make an educated guess based on his past comments. Trump has praised Saddam Hussein for being “good at killing terrorists“. He looks to improve relations with Vladimir Putin, Assad’s strongest backer. Most tellingly, Trump has said he will prioritize fighting the IS over fighting Assad. Taken together, these factors strongly suggest Trump will stop opposing Assad, if not directly support him in the fight against the IS.

In the short-run, backing Assad could make America safer by bringing stability to Syria, allowing the international community to focus on defeating the IS. Of course this strategy could also backfire by giving more fuel to anti-American parties in region, attracting more international terrorist attacks and inspiring domestic lone-wolf attackers.

But let’s just say, for arguments sake, that the IS already considers the U.S. its primary enemy, and is already doing all it can to attack America. Even if this is true, Trump’s strategy is still flawed. By failing to consider the root causes of the current instability of the Middle East—poor, unaccountable governance—Trump’s strategy will exacerbate the regions problems and create new ones.

In the long-run, not opposing Assad will embolden others to follow his playbook for staying in power at any cost. Rollbacks in human rights and governance will create future civil wars, resulting in power vacuums. From these power vacuums new terrorists groups will emerge, threatening America’s safety (with even more fodder for anti-U.S. propaganda). The only people this strategy will ultimately benefit are those who profit from the military-industrial complex. Humanitarian spending will also continue to rise from already historic levels if Trump abandons preventative peacebuilding through trade, development aid, and democratic capacity building in favor of aligning with dictators.

To be fair, when it comes to the Syrian Civil War, there are no good options. There are, however, worse options. Based on what he has said, and who he has nominated to be his national security adviser, Trump seems primed to pursue these worse options.

The Marks of a True Leader

All politicians must balance short-term needs with longer-term considerations. Focus too much on the long-run, and people will suffer in the short-run–to quote John Maynard Keynes, “in the long-run, we’re all dead”. But when it comes to Donald Trump, who has shown himself to be especially thin-skinned (constantly alleging media bias, demanding apologies from Broadway actors, attacking comedic parodies on SNL), whose main consideration has seemingly always been status and popularity, one can only imagine how greatly he will discount any future damage his policies might cause in order to look good now.

It is one thing to have policies not meet their intended long-term goals due to unanticipated consequences or unforeseeable changes in the world. But in the case of Trump’s proposed policies, the writing is right there on the wall. It is not that the Obama administration did not consider these “fixes”, it is that their negative consequences were deemed to be too great.

The other shoe will drop–it is a question of when, not if. Trump is counting on the negative consequences occurring on someone else’s watch, when they will be someone else’s problem. But what if they occur sooner than expected, while he is still in power? Well, there’s a scapegoat for that, and Trump has already proven himself to be a master scapegoater.

True leadership requires finding the right balance between short-term needs and longer-term considerations. It requires thick-skin, and the willingness to do what is right even when it is not popular. A good leader owns up to their failures and learns from their mistakes–there is not an ounce of accountability or introspection in Donald Trump.

Leaders can also benefit from a strong team with diverse opinions—people who challenge their views in order to create more robust, sustainable solutions. Throughout his campaign, Trump said he would appoint the best team possible to make up for his lack of governing experience. Looking at Trump’s current Cabinet nominees, I see mostly self-serving yes-men.

Based on these (and most other) definitions of leadership, President-elect Trump seems to be the furthest thing from a true leader imaginable.

It is important to identify and call out Trump’s shortsighted strategy now. People will point to immediate successes, should they come to pass, as vindication of his policy choices and governing style. Such celebrations would be premature.


1 Comment

Conflict Watch: How “Starve-the-Beast” Failed The Most Vulnerable at Home and Abroad

In consecutive Op-Ed articles, NYT writer Thomas Friedman considers how unscrupulous leaders and U.S. foreign policy have failed those dedicated to pluralism and democracy in the Middle East:

What to do With the Twins?:

Iraq and Syria are twins: multiethnic and multisectarian societies that have been governed, like other Arab states, from the top-down. First, it was by soft-fisted Ottomans who ruled through local notables in a decentralized fashion, then by iron-fisted British and French colonial powers and later by iron-fisted nationalist kings and dictators.

Today, the Ottomans are gone, the British and French are gone and now many of the kings and dictators are gone. We removed Iraq’s dictator; NATO and tribal rebels removed Libya’s; the people of Tunisia, Egypt and Yemen got rid of theirs; and some people in Syria have tried to topple theirs. Each country is now faced with the challenge of trying to govern itself horizontally by having the different sects, parties and tribes agree on social contracts for how to live together as equal citizens who rotate power.

In Iraq, the Shiite prime minister, Nuri Kamal al-Maliki — who had the best chance, the most oil money and the most help from the U.S. in writing a social contract for how to govern Iraq horizontally — chose instead, from the moment the Americans left, to empower Iraqi Shiites and disempower Iraqi Sunnis. It’s no surprise that Iraqi Sunnis decided to grab their own sectarian chunk of the country.

So today, it seems, a unified Iraq and a unified Syria can no longer be governed vertically or horizontally. The leaders no longer have the power to extend their iron fists to every border, and the people no longer have the trust to extend their hands to one another. It would appear that the only way they can remain united is if an international force comes in, evicts the dictators, uproots the extremists and builds consensual politics from the ground up — a generational project for which there are no volunteers.

I could say that before President Obama drops even an empty Coke can from a U.S. fighter jet on the Sunni militias in Iraq we need to insist that Maliki resign and a national unity cabinet be created that is made up of inclusive Shiite, Sunni and Kurdish leaders. I could say that that is the necessary condition for reunification of Iraq. And I could say that it is absolutely not in our interest or the world’s to see Iraq break apart and one segment be ruled by murderous Sunni militias.

ISIS / SISI:

ISIS and Sisi, argues Perlov, a researcher on Middle East social networks at Tel Aviv University’s Institute for National Security Studies, are just flip sides of the same coin: one elevates “god” as the arbiter of all political life and the other “the national state.”

Both have failed and will continue to fail — and require coercion to stay in power — because they cannot deliver for young Arabs and Muslims what they need most: the education, freedom and jobs to realize their full potential and the ability to participate as equal citizens in their political life.

We are going to have to wait for a new generation that “puts society in the center,” argues Perlov, a new Arab/Muslim generation that asks not “how can we serve god or how can we serve the state but how can they serve us.”

Perlov argues that these governing models — hyper-Islamism (ISIS) driven by a war against “takfiris,” or apostates, which is how Sunni Muslim extremists refer to Shiite Muslims; and hyper-nationalism (SISI) driven by a war against Islamist “terrorists,” which is what the Egyptian state calls the Muslim Brotherhood — need to be exhausted to make room for a third option built on pluralism in society, religion and thought.

The Arab world needs to finally puncture the twin myths of the military state (SISI) or the Islamic state (ISIS) that will bring prosperity, stability and dignity. Only when the general populations “finally admit that they are both failed and unworkable models,” argues Perlov, might there be “a chance to see this region move to the 21st century.”

“Both the secular authoritarian model — most recently represented by Sisi — and the radical religious model — represented now by ISIS — have failed,” adds Marwan Muasher, the former foreign minister of Jordan and author of “The Second Arab Awakening and the Battle for Pluralism.” “They did because they have not addressed peoples’ real needs: improving the quality of their life, both in economic and development terms, and also in feeling they are part of the decision-making process.  Both models have been exclusionist, presenting themselves as the holders of absolute truth and of the solution to all society’s problems.”

We tend to make every story about us. But this is not all about us. To be sure, we’ve done plenty of ignorant things in Iraq and Egypt. But we also helped open their doors to a different future, which their leaders have slammed shut for now. Going forward, where we see people truly committed to pluralism, we should help support them. And where we see islands of decency threatened, we should help protect them. But this is primarily about them, about their need to learn to live together without an iron fist from the top, and it will happen only when and if they want it to happen.

Essentially, the twin cases of Iraq and Syria have been a crash course in what not to do. The U.S. invaded Iraq without an established partner ready and willing to defend a pluralistic democratic society. We ended up spending trillions of dollars, found no “weapons of mass destruction”, and, given recent developments in the region, have left Iraq in worse shape than under Saddam (and by no means do I believe Saddam was a viable long term solution either, stick with me here).

In Syria, Iraq’s twin state, essentially the exact opposite situation played out. A war weary American public held the belief it was best to not intervene militarily in Syria in the early stages of the uprising. But Syria was not Iraq; there was an organic, grass roots, civil society movement based on modern pluralistic democratic governance ready to fill the power void. Assad was and continues to butcher his own people openly and indiscriminately, and the pluralistic movement based on soft power has ceded ground to vicious extremist groups and government bombardment. This story has many parallels to what has transpired in Egypt over the past few years.

We must assist legitimate, pluralistic, democratic movements in the developing world, as they are the key to sustainable human development. Going to war without such an ally is a fools errand, as The Iraq War has shown. Abandoning such an ally (as we have done in Egypt and Syria) results in the slaughter of innocents, reverses in economic development and human rights, and presents opportunities for the rise of extremism / authoritarianism. When such an ally presents itself, we must be ready to assist them, before it is too late and that ally is marginalized / defeated.

US Domestic Fiscal Policy:

The Iraq War highlights the greater folly of “starve-the-beast” economic policy. The central tenet of starve-the-beast is that government is just that, a beast, whose role must be minimalized. Notably, President W. Bush went to war in Iraq and gave large tax cuts during his presidency–he starved the beast. The U.S. government was therefore in a poor position to weather the Great Recession, creating somewhat artificial budget debates (even though for the U.S. Federal government, borrowing money was and remains little more expensive that spending from surplus).

Had Bush not given his tax breaks, and the U.S. was determining policy from the prospect of a huge federal surplus, one could argue that the American Recovery and Reinvestment Act would have been substantially larger (and therefore substantially more effective). President Obama deserves some of the blame for the inadequacies of the ARRA; he was a new president, very idealistic, and tried to make everyone in Washington happy instead of getting the best deal for the American people. Perhaps he wrongfully believed he could go back for more stimulus money later if needed–if so, this was a costly miscalculation. Nevertheless, the fiscal context against which the ARRA was drafted naturally played a role in its composition.

As the economic recovery drudges on for the vast majority of Americans (low growth, high unemployment, stagnant wages), one cannot help but wonder how different things may have been had the U.S. Federal government instead pursued somewhat counter-cyclical fiscal policies.

U.S. Foreign Policy

Getting the U.S. tied up in a decade of war sapped resources and public will to defend pluralism, human rights, and democracy abroad (understandably so; when they’re threatening to cancel your food stamps / unemployment insurance / pension, who cares whats going on in Syria?).

The U.S. fought a war we had no business fighting in Iraq, leaving ourselves unwilling to assist legitimate democratic movements in Egypt and Syria. This is the major consequence of starve the beast philosophy–when we waist money on things we don’t need now, we cannot afford the things we do need later (at least without relying on deficit spending). Domestically, unneeded tax cuts meant there was not enough stimulus money to jump-start the U.S. economy. Abroad, the will to intervene in situations where we should have intervened did not exist because of an unnecessary war.

Of all the costs of the Iraq War, our inability to assist our allies abroad in their time of need may indeed turn out to be our greatest failure.

It is up to civil societies to determine for themselves when to cast off the shackles of authoritarianism and demand modern and pluralistic democratic governance. It is the role of the U.S. and our allies to defend and nurture those movements whenever they present themselves.

(Earlier this week President Obama called for $500 million to train and assist the moderate Syrian opposition; file that one under too little too late category.)

The U.S. government is not a beast, it is a force for progress and socioeconomic justice both at home and abroad, and the leader of the “international community”. Have their been policy failures, both home and abroad, in recent history? Of course. This is no reason to dismiss the many positive outcomes stemming from American domestic and foreign policies.

Starving the beast has real costs for both America and the world’s most vulnerable people; it is mind boggling that it has been the rallying cry of a major American political party for decades.


Leave a comment

Economic Outlook: “Starve the Beast”, MMT, Debt Sustainability and the Debt Limit

I have, like many an economist, been preoccupied by the possibility of a U.S. debt default. How could our politicians willingly do something that is so obviously detrimental to American and global economic interests? Is there any precedent or historical clue which may shed some light on this phenomenon? It is possible, I would argue, that such a default is the current (and most heinous) manifestation of “starve the beast” political theory:

Starving the beast” is a political strategy employed by American conservatives in order to limit government spending[1][2][3] by cutting taxes in order to deprive the government of revenue in a deliberate effort to force the federal government to reduce spending. The short and medium term effect of the strategy has dramatically increased the United States public debt rather than reduce spending

On July 14, 1978, economist Alan Greenspan gave testimony to the U.S. Finance Committee: “Let us remember that the basic purpose of any tax cut program in today’s environment is to reduce the momentum of expenditure growth by restraining the amount of revenue available and trust that there is a political limit to deficit spending.”[5]

The earliest use of the actual term “starving the beast” to refer to the political-fiscal strategy (as opposed to its conceptual premise) was in a Wall Street Journal article in 1985 where the reporter quoted an unnamed Reagan staffer.[7]

Since 2000

The tax cuts and deficit spending of former US President George W. Bush‘s administration were attempts to “starve the beast.” Bush said in 2001 “so we have the tax relief plan […] that now provides a new kind—a fiscal straightjacket [sic] for Congress. And that’s good for the taxpayers, and it’s incredibly positive news if you’re worried about a federal government that has been growing at a dramatic pace over the past eight years and it has been.”[8]

Historian [Economist] Bruce Bartlett, former domestic policy adviser to President Ronald Reagan, has called Starve the Beast “the most pernicious fiscal doctrine in history”, and blames it for the increase in US government debt since the 1980s.[18]

For a historical look at government revenue and expenditure, please see here. The most useful number (IMO), is the % GDP comparisons.

But what is the connection between “starve the beast” and the “debt limit”? The answer lies in a simple analysis of Modern Monetary Theory:

A pivotal issue in our discussion turns out to be whether the central bank can or should hold the nominal rate of interest on government debt, R, below the rate of growth of nominal GDP, G. (We could frame the discussion in real terms instead by subtracting the rate of inflation, ΔP, from both sides; it makes no difference.) If R is held below G, then essentially any level of the government’s budget deficit is “mathematically sustainable,” a term we have been using to mean that the debt-to-GDP ratio does not grow without limit over time. On the other hand, if R exceeds G, the budget balance must show a primary surplus, on average over the business cycle, to achieve mathematical sustainability of the debt. (See the first of the posts referenced above for a detailed discussion of the conditions for mathematical sustainability.) 

The essential argument of MMT is that if growth rates are greater than interest rates, debt is sustainable and a government can run a budget deficit indefinitely (governments, unlike households, do not die). Japan, with its Debt/GDP ratio almost twice as high as the U.S., is a primary example the difference between debt sustainability versus total debt. Many of Europe’s “trouble countries” have trouble with much lower debt / GDP ratios (than Japan); without control of printing money, they are at the mercy of markets to borrow. These markets have been charging troubled countries a higher “risk premium”, pushing these countries into damaging austerity policies in the face of depressed demand. It is not the level of debt, but the interest that needs to be paid on it, that determines debt sustainability in a MMT model. 

In order to truly starve the beast, it is not enough to deny the U.S. government of tax revenue; the obstructionist must also increase the governments borrowing cost. This is exactly what a debt default would do, lead to higher borrowing costs. In fact, one of the main arguments by liberal economists for stimulus spending–other than the social and economic benefits of employing a substantial portion an idle workers and stimulating demand–is that the cost for doing so is for all intents and purposes the same as if we were running a government surplus! True the Fed can set the interest rate it pays by expanding it’s balance sheet, but this is an extraordinary role for the Fed to use only the most dire liquidity trap, not a viable long-term policy (due to inflationary effects of increasing the money supply when the economy is near or at full capacity).

There is certainly no proof that this is specifically anyone’s agenda. However, the same ideologies are behind “starve the beast” policies are behind holding the debt-limit hostage for fiscal concessions. We have to at least question the motives of these politicians; they are “rational” people, and until now I have heard no rational reason for such an unprecedented default. If the goal is to convince their opponents, who are likely to have Post-Keynesian if not MMT views of political economy, that certain policies are unsustainable, a default is–an irreversible way–to achieve such goals.

As the self-proclaimed party of fiscal responsibility, the GOP is leading America down the road of ballooning interest payments. Interest payments  already make up a substantial portion of total expenditure (8% and growing, twice as much as the federal government spends on education). A default would cause these payments to be substantially bigger, further constricting fiscal space for important social programs. We wouldn’t be getting more for less, or even the same for the same amount, we would receive less services for the same levels of expenditure. It is not fiscally responsible, but then again “starve the beast” and their contemporary “Tea Party” advocates were never really about fiscal responsibility.

Furthermore, follow a debt default the ensuing global recession would greatly raise the unemployment rate, driving up the spending on “automatic stabilizer” welfare programs that would otherwise be trending downwards in tandem with a growing economy.

You may say that no elected official would ever act so heinously and against the interests of the government and the American people; I would say read up on the history of the “starve the beast” political philosophy. It should also be noted that a default does not actually need to pass in order to result in higher borrowing costs / lower growth (making borrowing unsustainable based on a MMT framework); the specter of a default is enough to achieve these goals (the next debt-limit debate is set for February 2014). 


3 Comments

Conflict Watch: Austerity v. Human Rights

Original article:

“Austerity cuts in Spain could lead to the effective dismantling of large parts of its healthcare system and significantly damage the health of the population, according to a study published on Thursday.”

“The study published in the British medical Journal (BMJ) found that Spain’s national budget cuts of almost 14 percent and regional budget cuts of up to 10 percent in health and social services in 2012 have coincided with increased demands for care, particularly from the elderly, disabled and mentally ill.

The researchers also noted increases in depression, alcohol-related disorders and suicides in Spain since the financial crisis hit and unemployment increased.”

“The findings in Spain chime with other studies in Europe and North America which found budget cuts had a devastating effect on health, driving up suicides, depression and infectious diseases and reducing access to medicines and care.”

“‘If no corrective measures are implemented, this could worsen with the risk of increases in HIV and tuberculosis — as we have seen in Greece where healthcare services have had severe cuts — as well as the risk of a rise in drug resistance and spread of disease,’ said Helena Legido-Quigley, a lecturer in Global Health at LSHTM who worked with McKee.”

“In a book published in April, researchers said around 10,000 suicides and a million cases of depression had been diagnosed during what they called the “Great Recession” and the austerity measures that have come with it across Europe and North America.”

This is Spain we are talking about here–a high income, EU country. Perhaps incomes are too high, as unemployment remains above 27.2% (and 57 % for people under 25). Since Spain is a Euro country, it cannot devalue it’s currency to bring its wages back to a competitive level, it must pursue painful “internal devaluation”–a mixture of austerity and structural reform that has a contractionary effect on the economy in the short-run (especially when the fiscal-multiplier is >1, as evidence suggests it currently is).

This is of course unacceptable. Fiscal constraints did not stop large scale financial sector bailouts or military expenditure, but when it comes to financing social programs needed for governments to fulfill their basic human rights obligations there is suddenly no money available. Clearly governments around the world have their priorities out of order.

Unemployment, especially long term unemployment and youth unemployment, has a corrosive effect on society. In America, people are outraged over 8% unemployment, can you imagine a rate 300% higher? 700% higher!? There is literally Great Depression level unemployment in Spain and Greece, now 5 years after the Great Recession began.

The corrosive impact of unemployment creates a vicious cycle of human suffering. A lack of demand leads companies to lay workers off. Lower output leads to less tax revenue for the government, and global economic factors made resources scarcer, driving up borrowing costs. Governments, unable to borrow  money at reasonable rates, must slash social programs and government employment.

The unemployed, increasingly pessimistic, turn to risky behavior, including prostitution and drug use. This in turn leads to greater unfulfilled health needs, including untreated mental disorders. Long term unemployment, drug use, physical and mental illness all deteriorate worker skills, making them increasingly dependent on shrinking government resources. Stigmatization, the idea that the unemployed and homeless are that way because they are lazy or bad, becomes self-fulfilling.

Anti-social behavior becomes the norm, and before long even those who were not directly affected by the economic downturn begin to experience the realities of general societal degradation–increased crime and reduced personal security. Taken to it’s extreme, austerity in the face of a depressed economy lays the groundwork for protracted social conflict (PSC).   

The problem here is that social programs are being cut precisely when people need them the most. Fiscal policy should be counter-cyclical. When times are good, a prudent nation will save money for a rainy day. This is what President Clinton was attempting, and had President Bush’s “starve the beast” tax and military policies not bankrupted America, our national debt would be much lower today.

But America is seen as a safe haven, allowing debt to be rolled-over sustainably despite a high debt/GDP ration. If anything, Obamacare is evidence that the U.S. government is moving in the direction of greater public service expenditure.

This is not the case in Europe. Due to a lack of fiscal integration, peripheral EU countries (the GIPSI countries) suffered from higher interest rates (nobody wanted to lend to them as them scrambled to rescue a failing banking sector) leading to a “sovereign debt crisis”. The European Central Bank eventually decided to play the “lender of last resort” role, but on the condition that economically crippling austerity measures are passed.

It has always been clear that austerity programs have adverse human rights implications. The programs that are cut go predominantly to the most vulnerable people–human rights violations tend to compound one another.

Before we get ahead of ourselves, Europe is not heading for anarchy and regular unchecked violence in the streets. However, in some areas protests have already become the norm, and such a future is not impossible to foresee especially if the combination of depression-level unemployment rates, anti-social behavior, and crippling austerity persists.

Recently, the IMF admitted it was wrong about its the impact it believed austerity would have in Greece. This lesson will be painfully learned in many other countries unless something is done to fix this mistake (ending austerity conditions in order to unlock bailout loans). Admitting you made a mistake is the first step towards redress and accountability–it is past time governments were held accountable for their human rights obligations, in both the developing and developed world.

Only when human rights obligations are fulfilled can we achieve sustainable human development and economic growth, predominantly through the real and creative economies (as opposed to unsustainable economic development based on “financialization“).

However, this is only the first step, now international economic institutions have to “put their money where their mouths are” and make up for the needless suffering caused by general incompetence.

Enhanced by Zemanta


4 Comments

Economic Outlook: The Do-Nothing-GOP Vows to Do-Nothing

I took particular interest in a recent Politifact article highlighting House Speaker John Boehner’s assessment that “There’s no plan from Senate Democrats or the White House to replace the sequester.” This statement should not seem right to anybody who follows politics, the news, or simply has not been living under a rock for the past few months (years?). Have the democrats really dropped the ball, or is this more political jockeying by the Do-Nothing GOP? Unsurprisingly, it is the latter. The President and Senate democrats have proposed plans, just not the plans their opponents agree on. Politifact gave Boehner’s comment its worst possible rating “Pants on Fire”.

Democrats, both in the White House and Capitol Hill, have proposed alternatives to the sequester that involve cutting bloated programs and closing tax loopholes to raise revenue. The “Sequester”, as most know by now, cuts programs indiscriminately of their importance to overall economic and social security and without taking into consideration whether the program runs efficiently or not. This undesirable result was meant to be undesirable in the hopes of forcing congress into passing a more acceptable deal. Unfortunately, Congress was unable to envision its own incompetence, and the sequester became fiscal policy starting last Friday.  

But how could Boehner openly deny Democrats having offered alternative plans, when they clearly have (you can go on the White House website and “click a prominent button that says “SEE THE PLAN.” It leads to a page titled “A Balanced Plan to Avert the Sequester and Reduce the Deficit.”?”)

The answer given by Boehner’s representative would be comical, if it did not represent such a high ranking U.S. government official:

“A plan must demonstrate it has the ability to pass a chamber of Congress to be worth anything. We’ve twice passed a plan. We’re still waiting for the Senate to pass something, anything,” Buck told PolitiFact in an email.”

So the Do-Nothing-GOP has decided the democrats have not offered an alternative plan because they have made it their party’s goal to strike down any plan the Democrats offer. This sounds more like self-fulfilling economic suicide than two sides working towards an agreement that will work for the American people.

So what does the GOP require in a plan? It requires that tax loopholes that are closed must be met with equal reductions in government spending. In an effort to be “fiscally responsible”, the GOP has taken any proposal that will raise government revenue off the table.

“’Republicans want tax reform. We want to bring rates down for all Americans so that we’ve got a fairer tax code,’ Mr. Boehner said. ‘But to arbitrarily pull out a couple of tax expenditures and to say, ‘Well, we ought to use that to get rid of the sequester.’ Listen, every American knows Washington has a spending problem.’”

Does the U.S. really have a spending problem, or do we have a revenue problem? Let’s take a look at the numbers:

http://research.stlouisfed.org/fred2/graph/fredgraph.png?&id=FYFRGDA188S,FYONGDA188S&scale=Left,Left&range=Max,Max&cosd=1929-01-01,1929-01-01&coed=2012-01-01,2012-01-01&line_color=%230000ff,%23ff0000&link_values=false,false&line_style=Solid,Solid&mark_type=NONE,NONE&mw=4,4&lw=1,1&ost=-99999,-99999&oet=99999,99999&mma=0,0&fml=a,a&fq=Annual,Annual&fam=avg,avg&fgst=lin,lin&transformation=lin,lin&vintage_date=2013-03-06,2013-03-06&revision_date=2013-03-06,2013-03-06

The blue line represents Federal government receipts (revenue), the red line represents Federal government outlays (spending). A number of interesting takeaways from this graph:

1)      The U.S. was running a budget surplus until Bush gave that surplus away in the form of tax breaks (notice the blue line sharply going down around 2000) and spending on the “war on terror” (notice how the red line goes up when around the same time period).

2)      Federal government receipts are at their lowest point since the 1960s. This is partially due to Bush Era tax cuts (which have expired for the wealthiest Americans thanks to “Fiscal Cliff” negotiations, which is probably what the current small uptick represents) and partially due to exploitation of tax loopholes (and other forms of tax evasion, such as moving profits abroad).

3)      Government spending peaked during the American Recovery and Reinvestment Act of 2009, and has since been on the decline since.

Government spending is supposed to rise during a recession, the only reason this is a problem is because the surplus secured under President Clinton was squandered during a period of economic prosperity by President Bush. Instead of pursuing counter-cyclical fiscal policy, (save up during the good times to spend during the bad times) Bush did the opposite. Therefore, we have had to rely on deficit spending instead of spending out of a “rainy day fund”. While not exact science, if government receipts had stayed at Clinton-era levels, it appears our deficit would be about half of what it currently is (around 40% of GDP instead of 80%).

In an ideal world, we would be able to pass another stimulus program to jump-start the economy and reduce unemployment. As interest rates remain low, the government could worry about paying back this deficit once the economy is producing at its full potential. The deficit is a manufactured problem, a legacy of “starve-the-beast” fiscal policy championed by the GOP. The problem is that starve-the-beast does not work, you can reduce the amount of resources the government has, but you cannot reduce the programs people rely on to survive (especially not during times of high unemployment). What you get instead is a large government deficit.

A balanced approach to deficit reduction would be reasonable during healthy economic times. In the current economic climate, however, the red line will continue to come down on its own as the economy recovers and less people rely on entitlement programs. The blue line is the one that requires government action.

But Obama, ever the centrist, has tried to find a mixed approach of revenue increases and spending cuts that have a chance of passing a House vote. But it seems that the more Obama offers, the more the GOP demands:

“He had written a piece suggesting that if only Republicans knew how much Obama has been willing to offer, they might be willing to make a deal. Jonathan Chait set him straight, informing him that no matter what Obama put on the table, Republicans would find a way to say that it’s not enough. And sure enough, a Twitter exchange lets Klein watch that process in real time, as a top Republican consultant, confronted with evidence that Obama has already conceded what he said was all that was needed, keeps adding more demands.

So Klein admits that Republicans just don’t want to make a deal. Their objections to the deals on the table aren’t sincere; if convinced that Obama has met their demands, they just make more demands.”

The GOP has no interest in getting a deal done if that deal involves raising revenues. This is an absurd position, as government revenue is at its lowest point in decades. A balanced approach to avoiding the “Sequester” is not what the doctor ordered; fiscal stimulus and greater government revenue is the optimal fiscal policy for the American public. But the idea that we have a spending problem, and not a revenue problem, is wrong. A balanced approach is still better than the alternative, but the GOP is refusing to consider even a balanced plan to end the Sequester.

By refusing to consider any deal increasing revenue, the GOP has doubled down on its “Do-Nothing” approach to governance, to the detriment of the American people and American economy. The GOP manufactured this deficit with “starve-the-beast” fiscal policy, now it is manufacturing a need to reform entitlement programs NOW (these are long term issues, while the Sequester and stubbornly high unemployment are immediate problems that are not being addressed). 

The GOP is the party of the 1%. and the 1% are not being hurt as badly as the rest of us by the Sequester, so why should the GOP budge if it’s constituents are happy? Hopefully in 2014 the GOP receives 1% of the seats in Congress; representation based on those it truly serves. It has become clear that the Democrats need a complete majority in the Federal government if there is any hope of reversing the high unemployment and inequality and low levels of social mobility that have come to define contemporary America.

Enhanced by Zemanta