Dark Thoughts on the Coming Sequester

Dark Thoughts on the Coming Sequester

February 27, 2013

This week’s bout over federal spending pits Tea Party militants, conservative pundits and most Republican office holders against the President, his congressional allies and most economists who pay attention. But behind the politics, there is simply no economic basis for the immediate spending cuts that would follow the sequester — or immediate tax increases for that matter. The economy is still fragile enough that GDP went negative in the last quarter, when inventory purchases and federal spending both slowed more than usual. And just last weekend, Moody’s credit rating agency stripped the United Kingdom of its AAA rating — not because UK deficits are too high, but because Britain’s premature austerity policies are leaching away the growth required to make its deficits manageable. Moody’s decision only echoed recent warnings from the IMF and World Bank against just such precipitous moves to bring down cyclical deficits.

Back home, President Obama’s odds of prevailing on the sequester would be greater, if those who have made careers out of fetishizing a balanced budget were not receiving quiet support from much of Washington’s split-the-difference political pros, including a clutch of Democrats.  Looking out a few weeks, a chorus of self-described centrists and a few liberals could nudge the President into accepting a “compromise package” of substantial, immediate spending cuts and what Ronald Reagan used to call “revenue enhancers.” If it stops there, the economic damage will be contained. But the scenario could turn worse if, as seems likely, such a compromise also becomes embedded in a Continuing Resolution that will cover the rest of the fiscal year and create a new, lower baseline for 2014.

This premature austerity inescapably will weaken the economy, raising deficits even more down the line. Worse, such a bipartisan agreement could reinforce both parties’ natural resistance to contain Medicare spending and build up the tax base, especially over the long-term. And that could finally convince global financial markets that the United States has lost its way economically. The result would be higher interest rates, which in turn would mean even slower growth and higher deficits. What the markets want and have long expected from us is just fiscal common sense. That means, first, sidestep the sequester trap and instead increase federal investments in infrastructure, basic R&D along our technological frontiers, and access for all adults to upgrade their skills. Then follow it up with serious steps to contain long-term Medicare spending and expand the national tax base.



The American Dream Is in Big Trouble

February 19, 2013

The American Dream is a precious and curious thing. According to the basic narrative, if you work hard, opportunities will present themselves – which, to be sure, usually involve working even harder. And if you do this long enough, you’ll be able to raise a family in conditions that prepare your children, like you, to work hard for the opportunities to work harder. It should be said that the aspirations of most modern societies do not revolve around a lifetime of work. What makes the American dream something precious is the freedom to choose the work you do, especially if you’ve worked hard, and the prospect that your hard work will lead to a better life. Americans believe in this dream, because it generally has delivered as promised — at least until the last decade.

The next four years will test whether Mr. Obama can do anything meaningful about the economic forces which have recently blocked access to that dream for most Americans. In fact, a vivid statement of this problem hung in the Chicago campaign office of David Simas, who headed up polling operations for the President’s reelection. As it happened, the chart came from research and analysis which I did for NDN. That research showed how productivity and per-capita GDP grew fairly steadily from 1992 to 2009, while average incomes grew at nearly the same rates only until 2000, and then flat-lined for the past decade. Simas and David Axelrod, the president’s chief strategist, dubbed the chart the “North Star” of the campaign, while Time Magazine simply called it, “The Most Important Chart in American Politics.”

The chart was meant to remind the campaign staff that the rewards (income gains) of working hard (productivity and per capita GDP gains) had largely stopped for most Americans. From this came the campaign’s central theme of growth based on progress by the middle class, in contrast to Mr. Romney’s shopworn Republican faith in growth spurred by tax breaks for the wealthy. The theme has even gone trans-Atlantic: NDN’s Simon Rosenberg and I have made the same case to leaders of Britain’s Labour Party, and last week the Guardian reported that the analysis was reshaping that party’s agenda.

The realization that the long-time link between incomes and productivity gains and the link between job creation and growth had both weakened, actually came from research I had done for Futurecast, a book I published in 2008. Rosenberg and I had sounded the first alarm even earlier in an NDN report in 2005. By June 2007, NDN issued a long essay I did on how certain elements of globalization could hold down income progress and job creation even as productivity and GDP increase. And from that point on, we returned again and again to this new challenge to the American Dream. It was the subject of five of these blog essays in 2012, for example, as well as a Washington Post op-ed published just last week.

Now, we are developing additional analysis to gauge just how broad and deep the problem has become. Using new Census Bureau data, I recently tracked the income progress of every age group – those born, for example, in 1950, 1951, 1955, and so on — as it aged through recent expansions and recessions. Looking across all of the age cohorts, I found that people’s incomes grew an average of 1.5 percent per-year in the 1983-1989 expansion, followed by income losses of 2.6 percent per-year in the 1990-1991 recession. So, the entire 1983-1991 business cycle produced average, net income gains of 5.3 percent. Things got even better in the 1990s: Across all age groups, the incomes of Americans grew an average of 1.6 percent per-year from 1992 to 2000, followed by the brief and modest recession of 2011 which brought income losses averaging just 0.2 percent. Across all ages, then, the 1992-2001 business cycle produced average net income gains of 14.2 percent. That’s the American Dream truly paying off.

From that point on, all of the data point to the grim conclusions of the “most important chart in American politics.” Tracking all age groups as they aged through the 2002-2007 expansion, we find that people’s income grew an average of zero percent per-year over those six years, followed by income losses averaging 1.7 percent per-year in the 2008-2009 recession. So, the 2002-2009 business cycle produced net income losses averaging 3.4 percent across all age groups. For the first time in America’s postwar history, most people lost ground over the course of an entire business cycle. And the early signs for the current expansion are even more discouraging: In its first two years, 2010-2011, incomes across all age groups continued to fall at an average rate of 1.0 percent per-year.

In his response to the President’s State of the Union address, Marco Rubio gave the GOP’s current prescription for the American Dream: Cut federal spending now, because incomes and jobs can come back only if Washington will do less of everything. It’s the Romney platform without the tax cuts. It’s also the game plan which conservative governments in Britain and Germany followed faithfully, until it produced double-dip recessions in both countries.

Mr. Obama’s program, at least, starts in a reasonable place economically. For example, it focuses on research and development by promoting “advanced manufacturing,” and on a variety of efforts to upgrade people’s skills. The Census data do show that since 2000, people with graduate degrees have seen their incomes rise pretty steadily, though more slowly than in the 1980s and 1990s. However, recent evidence also suggests that a college degree no longer guarantees healthy income progress. A more comprehensive response also would involve, for example, steps to reduce certain business costs that come out of people’s wages and salaries, such as employer-provided medical coverage.

The President’s approach, by itself, won’t restore the American Dream. Like his senior campaign staff, however, he clearly recognizes the challenge we all face and its pivotal role in American life.