https://www.nakedcapitalism.com/2018/12/marshall-auerback-bets-china-wrong.html
-- via my feedly newsfeed
As we reach the end of the year, the economic recovery in the United States is approaching a new record for duration. In June, it will have its tenth birthday, passing the 1990s recovery as the longest one in US history. While recoveries do not die of old age, they do die. The length of this recovery has many looking for recession prospects on the horizon. At the moment, they are not clearly visible.
Before examining the risks, it is worth saying a bit about the good news. The length of the recovery has allowed the unemployment rate to fall to 3.7 percent, the lowest rate in almost 50 years.
It is important to remember that many people, including many in policymaking positions at the Federal Reserve Board, did not want the unemployment rate to fall this low. They argued that the inflation rate would begin to spiral upward if the unemployment rate fell below 5.0 percent.
We hit the 5.0 percent level in September of 2015. The world would look very different today if the inflation hawks had carried the day and the Fed raised interest rates enough to prevent the unemployment rate from dipping below this 5.0 percent mark.
If we flip the story and looked at employment rates, the employment rate for prime-age workers (ages 25 to 54) was 2.5 percentage points lower in September of 2015 than it is today. That translates into another 3.2 million people with jobs.
Furthermore, the beneficiaries have been overwhelmingly the most disadvantaged in the labor market. The unemployment rate for African Americans has fallen by 3.3 percentage points in the last three years. For Hispanics, the drop has been almost 2.0 percentage points. For workers with just a high school degree, the drop was 1.7 percentage points, and for workers without a high school degree, the drop was 2.3 percentage points.
The tighter labor market has also meant rising wages for those at the middle and bottom of the income ladder. The average hourly wage was rising at just over a 2.0 percent annual rate in the fall of 2015. In the most recent data, it was rising at a rate of slightly more than 3.0 percent.
Based on this acceleration in wage growth, it reasonable to speculate that wages for workers at the middle and bottom end of the labor market are 1.0-1.5 percent higher than they would have been if the Fed had slammed on the breaks back in 2015. While that may not sound like a big deal, for a worker earning $40,000 a year, that could be another $600 a year in wage income.
In aggregate, if a tighter labor market raised wages for the bottom half of the workforce by 1.5 percentage points, this translates into roughly another $50 billion a year in higher wages for this group. If we assume that most of the 3.2 million new jobs went to people in the bottom half, that amounts to another $90 billion in wage income. It is very hard to envision a new or expanded social program that gives $140 billion a year to people in the bottom half of the income distribution.
But enough of the good news, what about the next recession? Everyone keeps looking back to the last recession and trying to identify a bubble that will burst, causing another financial crisis and sinking the economy. Fortunately, there is no serious story here.
Many analysts point to the corporate bond market where there has been a large expansion of risky debt. While it is totally plausible that much of this debt will default if the economy slows, there is just not the same basis for the sort of downward spiral we saw with the collapse of the housing bubble.
In worst case scenarios, the holders of this debt take a hit of $300-$400 billion. That's bad news for them, but in an economy with close to $100 trillion in assets, that is not the stuff of recessions, much less major financial crises.
The stock market continues to be high by historical standards and could quite plausibly drop another 10 percent. This would be a hit to the wealth of many high- and upper middle-income people. But unlike the late 1990s, the stock market is not now driving the economy. The lost consumption as a result of diminished stock wealth would dampen growth by perhaps 0.5 percentage points at the low end, to 1.0 percentage points at the high end. Such loss would not drop the economy into a recession.
Housing prices are high, as I have noted in the past, but they seem driven by the fundamentals in the market, which are also driving up rents. Furthermore, construction has remained weak in this recovery, so there is not much room to fall, unlike in the bubble years.
With no obvious bubbles to burst, this leaves rate hikes from the Fed as the most likely source of the next recession. The Fed's rate hikes to date have undoubtedly had the effect of slowing growth. This is most evident in the housing market where most data on sales and construction are down from year-ago levels.
The Fed's rate hikes have also helped to push up the value of the dollar, which has increased the trade deficit. Higher rates have also played some role in dampening private investment as well as infrastructure investment by state and local governments.
The Fed has been reasonably cautious to date. Past rate hikes are unlikely to sink the recovery. Hopefully its caution will continue and it will allow workers to get further gains from a tight labor market. But if I had to take a bet as to what would be the cause of the next recession, it would be the Fed. After all, excessive rate hikes by the Fed have been the cause of most prior post-war recessions. They will also be the most likely cause of the next one.
The obscure Congressional budget rule known as PAYGO ("pay as you go") has burst into the news lately. A PAYGO rule means that any tax cut or spending increase passed into law needs to be offset in the same spending cycle with tax increases or spending cuts elsewhere in the budget. Incoming House Speaker Nancy Pelosi has indicated that the House of Representatives will abide by PAYGO in the next Congress, and this decision has sparked much controversy.
Many Washington insiders assert forcefully that committing to PAYGO rules in the House for the next Congress is good politics. The argument is that it assuages fears of politicians who believe they must make public commitments to lower deficits to avoid being punished by voters who care deeply about this issue. If voters do indeed have strong preferences for reducing deficits, then policymakers—even those who want to use fiscal policy to reduce inequality by expanding public spending and investment—must first commit to PAYGO to convince these voters that budget measures can both reduce inequality and be fiscally "responsible."
The strength of evidence supporting this political claim is debatable. What's less debatable is that PAYGO really has hindered progressive policymaking in the not-so-recent past. For example, it was commitments to adhere to PAYGO that led to the Affordable Care Act (ACA) having underpowered subsidies for purchasing insurance and, even more importantly, having a long lag in implementation; the law passed in January 2010 yet the exchanges with subsidies only were up and running by 2014. This implementation lag meant that the ACA's benefits were not as sunk into Americans' economic lives by the time a hostile Republican Congress and administration began launching attacks on it following the 2016 elections. It is a real testament to how much better the ACA made life for Americans that it has been stubbornly resistant to these attacks. But it would have been helpful to have a couple more years to have it running smoothly, but that didn't happen largely because the ACA's architects wanted to meet PAYGO rules over the 10-year budget window.
Even more fundamentally, it is terrible economics to view federal budget deficits as always and everywhere bad. Making good policy in the future will require that voters be educated on this front. Why not start now? After all, our failure as a society to understand the economics of deficits and debt greatly contributed to the destructive impact of the Great Recession of 2008–09. The stakes of allowing history to repeat itself are high enough that we should take the time to quickly recap the history of how costly irrational deficit-phobia has been.
In the generation before the Great Recession, D.C.-based policymakers and analysts from both political parties cultivated an unhealthy degree of fear around federal budget deficits. This excess fear of deficits led them to miss the real dangers facing the economy as the Great Recession approached. The root of the economic crisis of 2008–09 was the deregulation that allowed an enormous housing bubble to inflate to levels guaranteed to cause a deep recession when it inevitably burst. Yet most Democratic criticisms of the economic stewardship of President George W. Bush stemmed instead around his presiding over run-ups in federal budget deficits. In 2006, for example, then-Senator Barack Obama voted against raising the nation's statutory debt ceiling to signal his disapproval of excessively high deficits and debt. It was bad enough that excess concern over deficits blinded policymakers to gathering economic storms elsewhere. It was even worse that this deficit fear-mongering was happening while the federal budget deficit was extremely small and shrinking rapidly: the budget deficit in 2006 and 2007 averaged less than 1.5 percent of GDP—an amount that is absolutely sustainable forever.
This excess fear around budget deficits became an economic catastrophe during the recovery from the Great Recession. Despite multiple warnings that the American Recovery and Reinvestment Act (ARRA) of 2009 would not be at sufficient scale to generate a full recovery, 2010 saw a pivot away from defending the need for expansionary fiscal policy (i.e., running deficits to finance measures to support the economy) and toward prioritizing measures to reduce deficits. A prime example was in the January 2010 State of the Union address—when the unemployment rate was 9.8 percent—when President Obama said:
"But families across the country are tightening their belts and making tough decisions. The federal government should do the same. So tonight, I'm proposing specific steps to pay for the trillion dollars that it took to rescue the economy last year…Like any cash-strapped family, we will work within a budget to invest in what we need and sacrifice what we don't…"
Why am I taking you on this extended walk down the memory lane of irrational deficit-phobia? Because it had terrible consequences. The recovery from the Great Recession was the slowest in post-World War II history, and the degree of fiscal austerity canentirely explain its slowness. The figure below shows the growth in public spending per capita in the recovery following the Great Recession compared to previous recoveries. If this public spending following the Great Recession had followed the average path of the recoveries of the 1980s, 1990s, and early 2000s, a full recovery with unemployment around 4 percent would have been achieved by 2013.
Now, this austerity following the Great Recession was largely driven by Republicans—both in Congress and in statehouses. But the generation of bipartisan fear-mongering about deficits surely helped Republicans hold the line on spending cuts and claim that this austerity was fiscally responsible, even as voters suffered the economic consequences. The fact that Republicans' embrace of deficit-reduction is complete hypocrisy and always takes a backseat to their desire to cut taxes for the rich is infuriating, but it doesn't change the fact that fueling excess fear about deficits (even when done in the service of good policy goals like fighting regressive tax cuts) has been terrible economics.
Some people claim that the economic evils of PAYGO are overstated. After all, any sensible Congress would waive it if the economy entered a steep recession and needed expansionary fiscal policy, right? Here, it helps to look at the previous figure again—most of that spending austerity shown in the figure happened after the official recession ended, but occurred while unemployment remained extraordinarily high. The necessity for expansionary fiscal policy is not confined only to official recessions. As the economy takes longer and longer to mount full recoveries after recessions, the need for fiscal policy to remain expansionary even after official recessions end is becoming clearer.
Further, it is debatable whether or not some forms of spending—particularly public investments—should be subject to PAYGO at all. "Golden Rule" public budgeting argues that investments can be funded through debt. This makes eminent economic sense—the textbook reason to think that federal budget deficits can cause harm when the economy is at full employment and starved of savings is that deficits can raise interest rates and hence cause a reduction in productive business investment. But if deficits finance productive public investment, then total economy-wide investment is unchanged (as public investment just substitutes for private investment), and no economic harm is done.
Does arguing against PAYGO rules mean budget deficits are never harmful or that we can spend all we want without ever having to raise revenue to finance it? No. Deficits can, in certain circumstances, potentially put a steady drag on long-run growth. And progressives need to be full-throated about the need for taxes to be higher to both penalize economic "bads" (like greenhouse gas emissions and financial speculation) and to compress the income distribution to make for more broadly shared growth. And, yes, over the long run the large majority of public spending should, on average, be financed by taxes.
The current debate over PAYGO in the new Democratic majority in the House of Representatives will have very little direct effect on policymaking. The Senate is still controlled by Republicans, so little major legislation will be able to pass a divided legislature. And whatever the House decides to do with its internal rules, there remains a statutory PAYGO requirement that can only be loosened by the House and Senate together. So in the end, embracing PAYGO or not in the next House of Representatives is a purely political decision. In the short run, nodding toward conventional notions of "fiscal responsibility" and adopting PAYGO will likely win approving nods from Beltway pundits. But there's a long game that matters here, too; eventually we need to get much smarter about the economics of debt and deficits, and teach voters that the goal of fiscal policy is not always and everywhere to make deficits smaller. Our failure to do this has cost us dearly in recent decades, and now would be a good time to start.
The Friday night judicial ruling that, if it stands, will cost millions of people their health insurance and inflict untold physical, emotional, and financial harm on some of the most vulnerable people in the country came from Texas. But the legal theory on which the ruling was based came out of Madison, Wisconsin, where a few years back Gov. Scott Walker and the state's GOP legislature created a new Office of Solicitor General to pursue this kind of high-stakes litigation.
A bright, funny young man named Misha Tseytlin was hired to do the job.
When I met him earlier this year during a week-long visit to the University of Wisconsin, Tseytlin explained to me that he had no particular connection to Wisconsin when he took the position in 2015. He'd just been working as an attorney in the West Virginia Attorney General's office (another state to which he had no personal connection) in the general field of suing the Obama administration and he thought the Wisconsin gig would be a fun opportunity to expand his horizons in this regard. He cooked up this lawsuit, persuaded his bosses in state government to sign on, and eventually got 20 state governments to pursue his argument.
Friday night he scored his triumph — his kooky legal theory is the law of the land, according to at least one federal judge.
Other judges may disagree, and as best I can tell, experts in the legal community are deeply skeptical that this challenge will ultimately prevail, arguing that it reflects a fringy legal perspective. I'm not a lawyer myself — and more importantly, I'm not a psychic — so I don't know what Supreme Court Chief Justice John Roberts wants to do with this issue.
But what strikes me about the case is how utterly mainstream Tseytlin's theory became in GOP circles very quickly, and how brazenly undemocratic Republicans have been in pursuit of their goal of depriving people of their health insurance.
The Affordable Care Act was legitimized in the American political system three separate times. First, it was passed by two houses of Congress and signed into law by Barack Obama. Second, the Supreme Court ruled that, contrary to conservative legal theories, the individual mandate was a legitimate use of Congress's authority to tax. Third and most important, when Congress considered Affordable Care Act repeal in 2017, they ultimately wouldn't go for it.
Crucially, the kind of massive rollback of Medicaid that Speaker of the House Paul Ryan said he'd been "dreaming of" since he was in college "drinking out of kegs" was a nonstarter in the Senate, where many Republicans represented states that had benefitted from Medicaid expansion. So they ended up instead putting together a narrower "skinny" repeal bill that came close to passing but ultimately failed due to three GOP defections.
Then, months later, with repeal having fallen by the wayside, Republicans passed a tax bill whose main purpose was to cut rich people's taxes, but which also reduced the mandate penalty to $0. Presumably, if Republicans had wanted to vote for a bill that also repealed the ACA's Medicaid expansion, rescinded its exchange subsidies, and undid its suite of regulatory changes, they would have written a bill like that. But they considered a bunch of bills that would have done some of those things back in 2017, and the Senate rejected them. What they did instead was the tax bill.
Tseytlin's theory is that since the mandate penalty is now $0, it is no longer a tax. But since the mandate is in some sense still on the books, it now exists as an unconstitutional regulation. And since the bill has no severability clause, the existence of this one unconstitutional provision — a regulatory mandate with no penalty or enforcement mechanism — the whole thing is unconstitutional.
In effect, he argues, Congress — having considered repeal and rejected it — then repealed the whole bill a few months later. By accident. Whoops!
The idea of striking down a law in this way is almost comically undemocratic.
But the accountable, elected arms of the American political system do have easy ways to push back. For starters, the state attorneys-general who were pushing for this unpopular repeal scheme had to face the voters.
Josh Hawley, the attorney general of Missouri, for example, was in the midst of trying to get himself elected to the US Senate. His opponent, Claire McCaskill, quite naturally slammed him for his legal efforts to strip Missourians of key ACA regulatory protections, most of all the rules barring insurance companies from discriminating against patients with preexisting conditions. Hawley, however, cooked up an easy retort to this charge by running ads that lied about his position. He won.
Indeed, Republicans all up and down the country started misleading on this subject.
Which, after all, they had to do. Because even if for some narrow reason you buy Tseytlin's legal argument, the "problem" had a super-easy legislative fix this whole time. Simply make the mandate formally repealed and/or make the clause severable from the rest of the legislation and the whole strategy collapses. No accidental repeal after all!
But Republicans never acted on any such notion because they were hoping courts would throw the whole law out. And Republicans dealt with the unpopularity of that position by just lying to the voters about what they were doing.
While those lies weren't enough to save the GOP House majority, Hawley did successfully lie his way into a Senate seat — as did Rick Scott and several other GOP challengers. And then in Wisconsin things went full circle.
Scott Walker, the Wisconsin Republican governor who'd set this whole thing in motion, campaigned in 2018 by saying (falsely) that he supported preexisting conditions protections.
Unlike Hawley, he lost. So did other statewide GOP officials, including the state's attorney general. Democratic candidates for Wisconsin State Assembly won a majority of the votes. But thanks to gerrymandering, the GOP still held a majority of the seats. In his last act as governor, Walker signed a series of lame-duck bills reducing the power of newly elected Democratic Party officials statewide.
One of those bills makes it illegal for the new governor and new attorney general to withdraw the state from this ACA lawsuit. Hawley tricked people into believing he would defend preexisting conditions rules, and, starting next month, will use his authority as a US senator to do the reverse. Walker failed to trick people, lost his race, and then used his lame duck powers to do the reverse of what he said.
The striking thing about all of this, however, is that it's not just one oddball judge in Texas — it's 20 Republican attorneys general. And it's not just one GOP elected official misleading voters about their stance on preexisting conditions, it's dozens. And it's not just one losing gubernatorial candidate pulling an undemocratic fast one during the lame duck session — it's the near-unanimous decision of two different state legislative caucuses.
This is, evidently, how the overlapping networks of donors, operatives, activists, and elected officials who make up the GOP think the country should be run.
All of which is to say that the real Trump-era threat to democracy is the opposite of populism.
Trump has many of the mannerisms and much of the style of a plebiscitary dictator who wields demagogic rhetoric to turn the crowd against liberal institutions. But in a real-world sense, Trump and his political allies are unpopular, and people keep voting against them.
They nevertheless wield vast political power, however, because of institutions. The Electoral College, gerrymandering, and the maldistribution of Senate seats allow the GOP to enjoy political power that's disproportionate to their voting support.
A tight-knit group of Federalist Society lawyers and judges allow conservatives to advance policy ideas that lack public support through the judiciary. When in doubt, they fib and hope Fox News will help them muddy the waters.
The case will, of course, make its way up to higher courts, where hopefully cooler, more humane heads will prevail. But whether they do depends not just on the law but on the political context.
The rhetoric and practice of actual majoritarian populism — rather than simply assuming Chief Justice Roberts will do the right thing — is critical in moments like this. Judicial conservatives will be restrained in their activism if and only if they believe that defying the will of the people on such consequential matters will lead to their delegitimization.
It's a fear they ought to have. But one which will only develop if progressive leaders are able to move beyond excessive fear of populism and learn to speak the language of popular majoritarianism and democratic self-rule.