Ryan's proposal will increase inequality and the deficit

Wisconsin Congressman Paul Ryan and other deficit hawks are using scare tactics to achieve the long held Republican goal of dismantling Medicare and Medicaid and other social programs. Social Security cannot be far behind.

His budget bill would end the guarantee provided by Medicare and Medicaid to the elderly and the poor, which has been provided by the federal government with society’s clear assent since 1965. The elderly, in particular, would be cut adrift by Mr. Ryan. People now under 55 would be required to pay at least $6,400 more for health care when they qualified for Medicare, according to the Congressional Budget Office.

 Fully two-thirds of his $4.3 trillion in budget cuts would come from low-income programs.It would:

• cut food stamps by $127 billion, or 20 percent, over the next 10 years, increasing hunger among the poor. 
• cut Pell grants for all 9.4 million student recipients next year, removing as many as one million of them from the program altogether.
• remove more than 100,000 low-income children from Head Start
• slash job-training programs for the unemployed desperate to learn new skills.

Ryan's analysis that profligate spending on the poor and middle class is bankrupting America is a lie.

Only a decade ago the United States was running a surplus projected to be $5.2 trillion over ten years.

The current and projected deficits are largely the product of Bush era tax cuts (1.65 trillion that went mainly to the super rich) two wars ($1 trillion and counting) and the Great Recession which was caused by the Republican's manic pursuit of financial deregulation. See the graph and youtube video below for more details.

Ryan supported every single one of these deficit driving policies making his concern over the deficit impossible to swallow.

Ryan also proposes $2.9 trillion in tax cuts by lowering tax rates for the rich and corporations. People with incomes over $1 million would receive average tax cuts of $125,000.

This is not a serious deficit reduction plan. It is a budget that accelerates the nation's redistribution of wealth and income, already at historic highs, to the haves by undermining the nation's social compact with its poor and working middle classes.

Japan's stagnation a cautionary tale for the U.S.

The New York Times' Martin Fackler and Steve Lohr write that Japan's experience in responding to a financial crisis is that you need to restore economic growth before you worry about deficits.

Japan failed to restore growth. The result has been two decades of stagnation.

This is a cautionary tale for U.S. policy makers from both parties who have all but abandoned any attempt to jump start the economy.

I blogged about this in response to a Milwaukee Journal Sentinel op ed piece almost two years ago.

The entire NYT's article is linked.

Austerity economics will undermine recovery

A month ago the Milwaukee Journal Sentinel ran a column by Sheldon Lubar arguing:" The Age of Austerity is also what lies ahead for all of us today, not our grandchildren. This is the painful reality."

Putting aside the fact that tens of millions of working and middle class Americans, including the fifteen million who are unemployed and fifty million without health care insurance, have already been subject to the austerity of declining real wages, stagnate family incomes and soaring medical, education and real estate prices (until recently), Lubar is prescribing exactly the wrong medicine for what ails the U.S. economy.

Nobel Prize winning economist Paul Krugman repudiates Lubar and the austerity crowd:

For the last few months, I and others have watched, with amazement and horror, the emergence of a consensus in policy circles in favor of immediate fiscal austerity. That is, somehow it has become conventional wisdom that now is the time to slash spending, despite the fact that the world’s major economies remain deeply depressed.

This conventional wisdom isn’t based on either evidence or careful analysis. Instead, it rests on what we might charitably call sheer speculation, and less charitably call figments of the policy elite’s imagination — specifically, on belief in what I’ve come to think of as the invisible bond vigilante and the confidence fairy.

Krugman concludes:... the next time you hear serious-sounding people explaining the need for fiscal austerity, try to parse their argument. Almost surely, you’ll discover that what sounds like hardheaded realism actually rests on a foundation of fantasy, on the belief that invisible vigilantes will punish us if we’re bad and the confidence fairy will reward us if we’re good. And real-world policy — policy that will blight the lives of millions of working families — is being built on that foundation.

Krugman's column is worth reading and is linked here.

The Milwaukee Journal editorial Board also weighs in today with an editorial that explains why focusing on deficit reduction is not only wrong, but likely to undermine the recovery and revive the worst recession since the Great Depression.

Deficit hawks threaten recovery!

Nobel Prize winning economist Paul Krugman writes:

...we have a severely depressed economy — and that depressed economy is inflicting long-run damage. Every year that goes by with extremely high unemployment increases the chance that many of the long-term unemployed will never come back to the work force, and become a permanent underclass. Every year that there are five times as many people seeking work as there are job openings means that hundreds of thousands of Americans graduating from school are denied the chance to get started on their working lives. And with each passing month we drift closer to a Japanese-style deflationary trap.

Penny-pinching at a time like this isn’t just cruel; it endangers the nation’s future. And it doesn’t even do much to reduce our future debt burden, because stinting on spending now threatens the economic recovery, and with it the hope for rising revenues.

So now is not the time for fiscal austerity.

The rest of the article is linked.

The Journal Sentinel is wrong-the U.S. is not Greece

In a recent editorial the MJS editors implied that America’s deficit problems were caused by the same “out-of-control spending on government programs for aging populations”as Greece's. Social Security, Medicare and Medicaid were specifically cited. “Take heed” warned the state’s largest daily as it called for “new austerity” measures, presumably including cutting Social Security, Medicaid and Medicare.

Before we begin slashing our senior citizens' hard earned benefits we ought to take a closer look at the facts. As Noble Prize winning economist Paul Krugman wrote:

The truth, however, is that America isn’t Greece — and, in any case, the message from Greece isn’t what these people would have you believe.

So, how do America and Greece compare?

Both nations have lately been running large budget deficits, roughly comparable as a percentage of G.D.P. Markets, however, treat them very differently: The interest rate on Greek government bonds is more than twice the rate on U.S. bonds, because investors see a high risk that Greece will eventually default on its debt, while seeing virtually no risk that America will do the same. Why?

One answer is that we have a much lower level of debt — the amount we already owe, as opposed to new borrowing — relative to G.D.P. True, our debt should have been even lower. We’d be better positioned to deal with the current emergency if so much money hadn’t been squandered on tax cuts for the rich and an unfunded war. But we still entered the crisis in much better shape than the Greeks.

Even more important, however, is the fact that we have a clear path to economic recovery, while Greece doesn’t.

The U.S. economy has been growing since last summer, thanks to fiscal stimulus and expansionary policies by the Federal Reserve. I wish that growth were faster; still, it’s finally producing job gains — and it’s also showing up in revenues. Right now we’re on track to match Congressional Budget Office projections of a substantial rise in tax receipts. Put those projections together with the Obama administration’s policies, and they imply a sharp fall in the budget deficit over the next few years.

Greece, on the other hand, is caught in a trap. During the good years, when capital was flooding in, Greek costs and prices got far out of line with the rest of Europe. If Greece still had its own currency, it could restore competitiveness through devaluation. But since it doesn’t, and since leaving the euro is still considered unthinkable, Greece faces years of grinding deflation and low or zero economic growth. So the only way to reduce deficits is through savage budget cuts, and investors are skeptical about whether those cuts will actually happen.

It’s worth noting, by the way, that Britain — which is in worse fiscal shape than we are, but which, unlike Greece, hasn’t adopted the euro — remains able to borrow at fairly low interest rates. Having your own currency, it seems, makes a big difference.

In short, we’re not Greece. We may currently be running deficits of comparable size, but our economic position — and, as a result, our fiscal outlook — is vastly better.

That said, we do have a long-run budget problem. But what’s the root of that problem? “We demand more than we’re willing to pay for,” is the usual line. Yet that line is deeply misleading.

First of all, who is this “we” of whom people speak? Bear in mind that the drive to cut taxes largely benefited a small minority of Americans: 39 percent of the benefits of making the Bush tax cuts permanent would go to the richest 1 percent of the population.

And bear in mind, also, that taxes have lagged behind spending partly thanks to a deliberate political strategy, that of “starve the beast”: conservatives have deliberately deprived the government of revenue in an attempt to force the spending cuts they now insist are necessary.

Meanwhile, when you look under the hood of those troubling long-run budget projections, you discover that they’re not driven by some generalized problem of overspending. Instead, they largely reflect just one thing: the assumption that health care costs will rise in the future as they have in the past. This tells us that the key to our fiscal future is improving the efficiency of our health care system — which is, you may recall, something the Obama administration has been trying to do, even as many of the same people now warning about the evils of deficits cried “Death panels!”

So here’s the reality: America’s fiscal outlook over the next few years isn’t bad. We do have a serious long-run budget problem, which will have to be resolved with a combination of health care reform and other measures, probably including a moderate rise in taxes. But we should ignore those who pretend to be concerned with fiscal responsibility, but whose real goal is to dismantle the welfare state — and are trying to use crises elsewhere to frighten us into giving them what they want.

Deficit reduction will perpetuate mass unemployment

Nobel prize winning economist Paul Krugman warns that if deficit hawks like Wisconsin's Republican Congressman Paul Ryan get their way mass unemployment will continue:

What worries me most about the U.S. situation right now is the rising clamor from inflation hawks, who want the Fed to raise rates (and the federal government to pull back from stimulus) even though employment has barely started to recover. If they get their way, they’ll perpetuate mass unemployment. But that’s not all. America’s public debt will be manageable if we eventually return to vigorous growth and moderate inflation. But if the tight-money people prevail, that won’t happen — and all bets will be off.

Focus on deficit reduction ignores unemployed

Budget deficit hawks, including Wisconsin Congressman Paul Ryan, have been successful in shifting the nation's focus from our unacceptably high rate of unemployment to the deficit.

Noble prize winning economist Paul Krugman says the reason is partisan "politics."

The main difference between last summer, when we were mostly (and appropriately) taking deficits in stride, and the current sense of panic is that deficit fear-mongering has become a key part of Republican political strategy, doing double duty: it damages President Obama’s image even as it cripples his policy agenda. And if the hypocrisy is breathtaking — politicians who voted for budget-busting tax cuts posing as apostles of fiscal rectitude, politicians demonizing attempts to rein in Medicare costs one day (death panels!), then denouncing excessive government spending the next — well, what else is new?

The trouble, however, is that it’s apparently hard for many people to tell the difference between cynical posturing and serious economic argument. And that is having tragic consequences.

For the fact is that thanks to deficit hysteria, Washington now has its priorities all wrong: all the talk is about how to shave a few billion dollars off government spending, while there’s hardly any willingness to tackle mass unemployment. Policy is headed in the wrong direction — and millions of Americans will pay the price.

The entire op ed is linked.

Recession causes deficit to grow

The While House released an updated estimate of the federal budget deficit, which shows it now totals $1.6 trillion or 11.2% of gross domestic product. This is $262 billion less than what was estimated in May. The Congressional Budget Office showed a smaller improvement.

The new numbers confirm that the recession has caused the deficit to increase significantly.

Lower incomes, higher unemployment, and reduced business activity have combined to produce the lowest level of federal revenues – as a portion of GDP – in more than 50 years.

Policy measures aimed at stabilizing the economy have also added to the deficit, though to a much smaller extent: Stimulus investments made under the American Recovery and Reinvestment Act account for only about one-eighth of the deterioration in the 2009 deficit relative to pre-recession estimates.

Some will use this report as an opportunity to call for immediate action to reduce the deficit, or to suggest that we need to abandon or delay major policy initiatives, like investments in green technologies and two year colleges and health care reform. But given that the current deficit is largely caused by the recession, any efforts to reduce the deficit would choke off a recovery. That would be self-defeating and irresponsible.

Ryan ignors the unemployed to fight phantom foe

When the U.S. Bureau of Labor Statistics issues its February unemployment report on Friday expect more bad news.

My back of the envelope analysis projects that employers eliminated almost 700,000 jobs in February which will cause the unemployment rate to rise to 8%, the highest rate since the recession of 1981.

In January 2009 employers slashed 598,000 jobs. It was the worst monthly job loss since December 1974, and brought job losses to 1.8 million in just the last three months, or half of the 3.6 million jobs that have been lost since the beginning of 2008.

The job loss since November is the biggest 3-month drop since immediately after the end of World War II, when defense contractors were shutting down for conversion to civilian production.

January's job loss caused the unemployment rate to rise to 7.6%, its highest level since September, 1992.

As bad as the unemployment rate is, it only tells part of the story for people struggling to find jobs. The January report also showed that 2.6 million people had been out of work for more than six months, the most long-term unemployed since 1983.

And that number only counts those still looking for work. The so-called underemployment rate, which includes those who have stopped looking for work (discouraged workers) and people working only part-time that want full-time positions, climbed to 13.9% from 13.5% in December. That is the highest rate for this measure since the Labor Department first started tracking it in 1994.

Despite these gloomy number Wisconsin Congressman Paul Ryan (R) continues to oppose efforts to jump start the economy.

Ryan voted in lock step with his Party in opposing the stimulus package that provides help to the unemployed and their families by increasing unemployment benefits and food stamps and expanding eligibility, increasing Pell Grants, and investing in job creating infrastructure projects and education. Ryan's fiscal conservatism, incidentally, is new. When his Party was in power he voted for the 2001 and 2003 high income tax cuts which caused more than 50% of the Bush era record deficits.

Instead of voting for legislation that helps unemployed workers and their families, Ryan has waging war against an imaginary boogie man, stagflation that even he admits does not currently exist.

Nouriel Roubini, the NYU economics professor know as Dr. Gloom because he correctly predicted the current recession more than a year before it began, argues, contrary to Ryan' imaginary stagflation, that without even more aggressive federal action "this ugly U-shaped recession may turn into a more virulent L-shaped near-depression or stag-deflation (a deadly combination of economic stagnation and price deflation like the one Japan experienced in the 1990s after its real estate and equity bubbles burst."

Ryan has also criticized the President's proposed budget. "If there's anything that economists on the left and the right agree on, that supply-siders, classic economists and Keynesians agree on, you don't raise taxes in a recession," said Rep. Ryan. "This budget is raising taxes in a recession." Ryan was joined in his opposition by among others the American Petroleum Institute, the oil industry's most powerful trade group.

Ryan is either badly misinformed or deliberating misleading the public.

The economic stimulus package signed into law by Obama last week enacted one of the largest tax cuts ever, which made good on Obama's campaign promise to cut taxes for 95 percent of Americans. The first benefits from these cuts should be seen no later than April 1, 2009.

Obama has proposed increasing marginal tax rates on the richest 5%, people earning over $250,000 annually, and on hedge fund executives who have used tax loopholes to pay lower rates than middle income Americans. As Office of Management and Budget Director Peter Orszag said, "Folks need to actually look at the budget document." To avoid raising taxes during the recession, these increases will not take effect until 2011.

The ranks of the unemployed are growing. People in Wisconsin are losing their jobs, their healthcare and their homes. It's time for Congressman Ryan to worry less about imaginary problems and phantom tax increases and devote his attention to the real problems facing Wisconsin's increasingly beleaguered working families.

Governor is right-film industry tax credits are costly and ineffective

When Universal Pictures reached an agreement with the Wisconsin Department of Commerce to produce "Public Enemies," the Johnny Depp film about 1930s gangster John Dillinger, the film makers and their supporters were ecstatic. They projected the production would spend up to $20 million in the state while receiving tax breaks worth only $3.9 million. Quite a deal.

But when the "Public Enemies" production packed its bags last year, state taxpayers gave the movie company back almost every penny it had invested in Wisconsin.

The Wisconsin Department of Commerce reports that film makers spent only $5 million, 25% of the promised investment, but were paid $4.6 million in incentives, $700,000 more than projected.

$2.7 million was spent on the salaries of non-Wisconsin residents who worked on the film - almost twice what was paid in salaries to Wisconsin residents employed by the production.

At a time when tens of thousands of Wisconsin workers are losing their jobs and the state is struggling with a $5.7 billion deficit, taxpayers covered $450,000 of director Michael Mann's $1.8 million salary. They weren't on the hook for the stars' salaries only because they are not eligible for the tax credit program. But those who provide services including hair and makeup to the stars were included. And all of those working for Depp were brought in from out of state.

This program is a boondoggle. It creates few jobs, doesn't generate revenue and has a very small multiplier effect.

Governor Doyle who says the credits cost too much and don't create permanent jobs has proposed eliminating the program.

Wisconsin's budget is riddled with tax expenditures like this one that fail to deliver promised jobs and economic activity, but contribute to the state's $5.7 billion budget deficit.

Legislators should support Governor Doyle effort to eliminate this program.

Wisconsin's experience is not unique.

Forty states now offer to pay 25 percent to 40 percent of film production costs. Taxpayers around the country are reimbursing producers for everything from crewmember meals to movie-star salaries. But there is little evidence that such handouts are fiscally sound.

One of the best studies on film industry tax breaks comes from Louisiana's Legislative Fiscal Office. Louisiana experienced an explosion of film production after enacting a tax credit in 2002—from around $20 million a year to the present $350 million. But Louisiana recovered just 18 percent of $121 million in film credits awarded in 2006.

As for the jobs, the report projected that Louisiana's tax credit would generate, at most, around 3,000 jobs and said the economic impact outside the film industry was "likely to be modest." For every dollar of revenue lost to the tax credit, only 15 to 20 cents was recovered in associated business.

With its 25 percent subsidy on in-state production expenses, Massachusetts experienced significant leakage as much of the money it paid went for the salaries of out-of-state movie stars, who spent very little in Massachusetts. The Massachusetts Budget and Policy Center recently reported that the film subsidy rate is five times higher than what the state offers for developments in blighted areas.

Even more troubling, a report by the New Haven-based think tank Connecticut Voices for Children projects that Connecticut's tax credits would reduce the state's revenues by $118 million in fiscal year 2009.

Rhode Island, Michigan and Louisiana have all made moves to rein in overly generous subsidies, concluding they have not delivered all the promised jobs and revenues.

Competition between states to attract film companies generates a race to the bottom as states offer larger and larger incentives to lure film producers. The United States has become in the words of the Incentives Office, a consulting firm in Santa Monica, Calif., the New Bulgaria, a reference to what was once the film industry’s favorite low-cost production site. The movie houses make out like John Dellinger, but taxpayers are left holding the bag.

The Tax Foundation summed up the problems with subsidizing the film industry:

...many legislators see these tax give-aways as a way to attract business to the state, taking credit for creating new jobs but ignoring the tax policy implications. Tax breaks for any industry make the tax base smaller and the tax code less neutral...

Ultimately, the main beneficiaries are not taxpayers but lawmakers. Every incentive package ...allows lawmakers to make public announcements taking credit for "new jobs." Location-based incentives can therefore be thought of as a market transaction between lawmakers and film companies. Lawmakers purchase favorable media coverage for themselves, film companies accept payment for filming in economically unprofitable places, and taxpayers finance the deal. It's hard to see how that's good policy.

The glamour of movie-making may be hard for policymakers to resist, but they could better serve their constituents by simply watching a movie at the local movie theater and leaving Hollywood in California.