Sunday, February 24, 2013

The Machete vs. The Scalpel: Why John Boehner is Playing It All Wrong

In the 2008 Presidential debates, Senator John McCain proposed across-the-board cuts the federal budget as a starting point on the road towards deficit reduction.

Then-Senator Barack Obama responded: "Senator McCain is looking to apply a machete to the budget when what is needed is a scalpel", essentially criticizing the indiscriminate nature of across-the-board spending cuts and making the point that he would be more surgical about what he would cut.

An aghast John McCain, having seen federal spending expand wildly across virtually every budget line item during George W. Bush's Presidency, responded, "I would apply a machete and THEN a scalpel."

The current hysteria in Washington over the sequester would make you believe that it is a big machete - that massive reductions to federal programs will take place, starving the poor, endangering national defense and putting food safety and clean air at risk.

What the sequester actually amounts to is $85 billion in cuts, material to be sure, but we are talking about a federal budget of $3.6 trillion, meaning the sequester essentially amounts to 2.4% reduction in planned federal spending.  If you had to take a 2.4% pay cut in your personal life, you wouldn't like it, but, it probably wouldn't mean that you wouldn't make the mortgage or car payments - it would probably be more akin to having to eat out once less in a month or moving from 93 octane to 87 octane gas.

It has been pointed out by some, correctly, that since entitlements are not impacted by the sequester, that the remaining elements of the federal budget will endure far greater percentage cuts than the overall 2.4%.  And they are right, to a point.  Entitlement spending makes up $2.1 trillion of the $3.6 trillion federal budget.  Federal interest payments, which obviously cannot be directly impacted by the sequester, makes up about another $200 billion.  Put those together and you have $1.3 trillion of discretionary spending across which the $85 billion reduction is spread.  This therefore equates to a 6.5% cut to other programs, across-the-board.

A 6.5% cut might sound more severe and that some of the hysteria is warranted, but let's place it in proper context.  Since the year 2000, discretionary spending has grown by 72%, or a compound annual growth rate of 4.5%.  Adjusted for inflation, this means real discretionary spending has grown by 39% over that time period.  It would seem that, being that most people would say government was relatively more functional in 2000 than it is today, that "only" being 32.5% higher in discretionary spending in real terms is a very small machete indeed.

So it was with a degree of shock that I read John Boehner's piece in the Wall Street Journal, bemoaning the sequester and laying blame at the feet of President Obama.

Speaker Boehner opens his editorial with the following line:
"A week from now, a dramatic new federal policy is set to go into effect that threatens U.S. national security, thousands of jobs and more."

This is utterly contradictory.  Isn't it Boehner and the Republicans that have always stated that government spending doesn't create jobs?  Aren't they the anti-Kenyes party?  Threatens national security?  A 6% cut in a defense budget that his TRIPLED since 2000?  Is he serious?

If the GOP is going to be the party of deficit reduction through spending cuts, getting hissy over a 6% cut in defense spending is a bit absurd.

The Speaker does make a legitimate point that entitlements must be dealt with.  At 61% of all federal spending, it is difficult to imagine a scenario that balances the budget with entitlement reforms.  The Speaker is also right that the sequester is a crude instrument, making no distinction between effective and ineffective programs.

But Republicans should be taking an AND approach to budget cuts - do the sequester AND eliminate ineffective programs AND reform entitlements.  While an across-the-board cut is a crude machete, it is a small one.  Lots of private corporations do similar exercises to control spending - think of how troubled companies do across-the-board pay freezes or cancel all travel, often not distinguishing between top and bottom employees or value-added versus non-value added travel.  Across the board approaches are a quick way to get cost containment.  THEN, you go after the tough trade-offs.

John Boehner opposes any and all tax increases.  If he is serious about cutting the deficit, he should be advocating for any-and-all budget reduction opportunities.  By sound hysteria over relatively small budget cuts, he just looks like an idiot.  The answer is machete AND scalpel.

Saturday, February 16, 2013

My Apologies to the Readers, Why the GOP is Failing, Worse Than Damn Lies on the Minimum Wage

Sorry I Missed You
There were many visitors to this space the night of the State of the Union.  Most years, I cover the State of the Union, as I do all major American political events.  It was simply personal circumstances beyond my control that caused me to miss the speech (which I was just finally able to watch, along with Marco Rubio's Republican response.)

I am continually humbled by the number of people that come here to learn a little bit more about our Republic and its politics.  I am sorry to have missed you this State of the Union.

Where is the Optimism?
The Republican Party has been out in the wilderness for a little while now.  They have been out of the White House for over 4 years now, have not controlled the Senate in over 6 years and have controlled the House for only 2 of the last 6 years.

This is hardly unprecedented in US politics.  The Democrats were cast from the White House for all but 4 of the 20 years from 1973-1993, when a young Governor from Arkansas named Bill Clinton revitalized the Democratic center coalition.

Republicans were completely out of power in both Houses of Congress all the way from 1955 until the Reagan revolution coattails swept them into power in the Senate in 1981.

The Republican Party certainly has the capability to return to power.  We are naturally a nation of economic conservatives (at least as compared to our first world allies) and while demographic shifts appear at the moment to be a huge headwind to the GOP, the growing Latino voter base is largely socially conservative and family-oriented, a seemingly natural constituency for the GOP.

But right now, the GOP isn't helping itself.

What Bill Clinton for the Democrats and Ronald Reagan for the Republicans had in common when they led their parties back from the wilderness was optimism.  They had powerful, positive visions for the country and sold them with a smile.

Voters are drawn to optimists.  They tell us about what is possible.  They propose solutions to seemingly overwhelming problems that sound reasonable.  They stoke our patriotism.

Pessimism doesn't sell.  It implies a lack of faith in our nation.  It promises a bleaker future.  It isn't a product anyone wants to buy.

And herein lies the core problem for the GOP - a lack of optimism.  From chattering heads to internet message boards to elected officials, the words coming out of the GOP imply that we are going to hell in a hand basket.  This is a natural extension of very overheated rhetoric in both the 2008 and 2012 campaigns.  The thinking goes - President Obama is a socialist or even a communist and we've been saying for years that if he got into office, he was going to wreck the country, so it must be true.  I think Francois Hollande is laughing somewhere at the notion that the President is a socialist.  We debate the difference between 35% and 39.6% marginal tax rates - the French impose top taxes of 75% when they get a "real" socialist in office.

The man or woman who can step forward and paint a truly optimistic vision for the country will emerge as the natural leader of the GOP.  Based on the State of the Union response from Marco Rubio, which was a drab and uninspiring affair, I do not believe that man will be Marco Rubio, at least not yet.  I'd look to the Governor's mansion, where you have people building that optimistic vision.  Think Bobby Jindal, Chris Christie and Mitch Daniels.  Pragmatic men who work hard to build better states.  Leave the Tea Party and the wingnut survivalists behind and you have a path back to leadership.

Is the Wall Street Journal Ignorant or Dishonest?
I like the Wall Street Journal.  While they have a clear conservative bent, they provide excellent reporting on the world of business and do strong investigative journalism into corporate wrongdoing.

So it is quite disappointing to me that they would publish a highly intellectually dishonest commentary on proposed minimum wage hikes entitled "The Minority Youth Unemployment Act".  In the piece, the Journal argues that hiking the minimum wage would lead to fewer available minimum wage jobs, which would disproportionately impact young minorities.

It was once said that in the order of significant lies, there are lies, damn lies and statistics.  Such is certainly the case with the Journal piece.

Firstly, they present a graph that shows minimum wage hikes and black youth unemployment and total you unemployment plotted on a timeline from 2007 to the present, with hikes in the minimum wage from 2007 to 2009 noted on the graph.  The point the author attempts to make is that youth unemployment spiked from 2007 to 2009, correlated with the rise of the minimum wage from 2007 to 2009.

The chart is factual but wildly deceiving.  Any first year statistics student knows that correlation does not imply causation.  Murders and ice cream consumption spike at the same time every year, but no fool things ice cream causes murder, the thoughtful realize that both spike in the summer for different reasons.  Certainly, the minimum wage went up during that time period (due to a bill supported and signed by President George W. Bush, incidentally), but there was also this little financial crisis that led to the Great Recession.  Does anybody with connected brain cells not think that the financial crisis led to the spike in unemployment?

To punctuate that point, note that the author singles out just one set of minimum wage hikes and does not chart the countless other minimum wage hikes and corresponding unemployment rates.  The hike from 3.80 to 4.25 in 1991?  Unemployment crashed after that one on the heels of an economic recovery.  The successive hikes from 4.25 to 4.75 and then 5.15 in 1996 and 1997?  The economy recorded some of the lowest unemployment rates in history following those hikes.

Bottom line, cherry-picking only the data that support your point of view is the type of deception that should be reserved for political spin doctors, not publications that are ostensibly paragons of journalism.

The premise of the article, that higher minimum wages lead to employers refusing to hire workers also defies logic.  As any first year business student knows, businesses exist to make money.  They don't generally employ workers that are unnecessary.  If a hotel needs 5 maids in order to clean all the rooms, they are going to hire 5 maids, whether the minimum wage is $7.15 or $9.00.  They aren't going to hire 5 extra maids that they don't need if the minimum wage is lower. Likewise, they aren't going to hire 3 maids and simply not clean some of the rooms if the minimum wage is higher.  They are going to hire the people that they need.

What is true is that if labor costs rise, those costs will be passed on to consumers in the form of higher prices for things that require minimum wage labor, such as hotel rooms and fast food meals.  Companies still want to make their profit, so they simply mark up their items to maintain their profit margins.  This essentially amounts to a tax on all of us to support slightly higher wages at the bottom rung.

This is a trade-off that we have been willing to make as a country since 1938, when the first minimum wage law went into effect.

The minimum wage is near historic lows at the moment.  In real dollar terms, the minimum wage was $7.33 in 1950, slightly higher than today.  In 1956, it was then hiked to the equivalent of $8.57 in today's dollars and continued to rise from there in real dollar terms, peaking at a real-dollar rate of $10.74 in 1968.  It remained above $9/hour in real terms until 1981, when Ronald Reagan essentially put a freeze on minimum wage hikes, allowing it to fall in real terms (thanks to inflation) to under $6/hour in real terms before President George H.W. Bush signed a hike.

If higher minimum wages lead to higher unemployment and lower minimum wages lead to lower unemployment, unemployment should be near historic lows.

The Wall Street Journal article is dishonest and wrong.  I would like to hope this was out of ignorance, but given the depth of experience on the Journal editorial board, I suspect it was deliberately deceptive.

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Sunday, February 3, 2013

The Q4 GDP: Conservative Economics in Action, On To The Budget Battles

A Very Economically Conservative Quarter
The headline was scary - the US Gross Domestic Product contracted by 0.1% in the fourth quarter of 2012.  While this is just ever so slightly below the zero line, we are technically halfway to a new recession (traditionally defined as two consecutive quarters of contraction, although, in modern times, more complex definitions have been used) after what has been a less than stellar recovery from the last deep recession.

The recession more or less started in the first quarter of 2008 and lasted for 18 months.  During that time period, the size of our economy contracted by 4.6%.  This may not sound like a ton, but bear in mind that under "normal" circumstances, the economy needs to grow by 1% just to keep up with population growth and that contraction of the economy disproportionately impacts working class workers in industries like manufacturing, construction and retail and entertainment services, as belts tighten.

During the 18 month recession, unemployment skyrocketed from 5.0% to 9.5% (it would eventually peak after the end of the recession, in October 2009 at 10.0% - it is normal for unemployment to peak slightly after the recession ends, as companies don't start hiring until several months after business picks up) and 7.5 million jobs were lost, meaning that that the actual percentage of people working dropped even more than the official unemployment rate would tell.

Since then, the recovery has been painfully slow, against the norm for recessions (although, many would argue, not for recessions born of deep financial crises) and against the predictions of many, including myself, who expected a more "V-shaped" recovery.  Average growth in the 3+ years since the recession ended has only been 2.3%, which would be okay if the starting point was a healthy economy, but nowhere near sufficient to relieve the pain caused by the recession.  Unemployment has fallen to 7.9%, lower than the peak certainly, but way above pre-recession levels.  There are STILL 3.2 million less jobs now than when the recession started 5 years ago.  And it wasn't until the fourth quarter of last year that the GDP surpassed its pre-recession level.

This gap would make the fourth quarter GDP contraction very troubling.  But, looking at the internals, things aren't as bad as they appear on the surface.  This quarter is actually a positive argument for economic conservatism and austerity, if you look under the covers.

You see, while the overall GDP contracted by 0.1%, private sector GDP rose by 2.6%, while government expenditures at all levels fell by 2.7%.  In other words, the private sector is in recovery, as evidenced by rising corporate earnings and corresponding rising stock prices.  It is government that is shrinking.  Most of the reduction is coming at the state and local level, as governments are forced to balance their budgets and (with California as a big exception) are largely turning to reducing government spending as opposed to raising taxes to make ends meet.  There has also been some reduction of federal expenditures and some modest cuts from prior budget deals take effect and we lap the tail end of the stimulus spending.

So why is this a good thing?  Employment in the quarter is actually the strongest it has been in a long time.  You see, while the overall economy contracted, just over 600,000 net jobs were added in the quarter, even more than that in the private sector.  In other words, at least for this quarter, the reduction in government spending did not have a dampening effect on the thing that matters most to the average person - available jobs.  Private sector hiring more than made up for public sector austerity.

This model seems destined to play out to some degree on the federal level as well.  Sequestration cuts take effect automatically on March 1st and the Republicans have been pretty clear that while they would like to replace the defense cuts, they have no interest in punting on the amount of the overall cuts.  Good for them - I hope they stick to their guns.  We have to solve the budget deficit one way or another and while we can argue the balance between tax hikes and spending cuts, doing something is better than doing nothing.

Also in play is the federal budget - the current continuing resolution lapses March 27th, which means that if Congress does not pass some sort of budgetary measure to fund the government, the government will shut down on that date.  Republicans, having had to give ground on the tax cut debate, since tax rates were slated to go up automatically, are not in a giving mood on the budget.  They, after all, hold the cards this time around - no budget can pass without the consent of the Republican-majority House.

With the debt-ceiling discussion wisely out of the way (sanity did prevail, as I'd hoped, on that topic, with the GOP agreeing to suspend the debt ceiling at least until mid-May, long after the budget battles), federal spending will be front-and-center in Washington.

These debates will play out over the next 1 to 2 months.

Rebuilding a Second-Term Cabinet
President Obama has some work to do.  Much of his first-term cabinet has left or is leaving.  Let's review the status of the key cabinet-level department head positions:

State Department
Hillary Clinton, as we all know, has moved on.  This is one that the President doesn't have to worry about as former Senator John Kerry has already taken the top job at state, confirmed easily by a 94-3 vote in the Senate.  He took office February 1st.

Tim Geithner has already departed, officially resigning January 25th.  President Obama has nominated Jack Lew as his replacement.  Lew have his hearing in the Senate, but is widely expected to be confirmed, although he has generated some controversy.

Leon Panetta, President Obama's second Defense Secretary (his first, Robert Gates, was a keeper from the Bush Administration) is still in office but has asked to leave as soon as a successor can be confirmed.  Chuck Hagel just had his grilling this week before the Senate.  The majority of Republicans are expected to vote no for their dovish fellow Republican, but most expected that all 55 Democrats and Independents will vote for Hagel and that few enough Republicans will want a filibuster fight that he will ultimately be confirmed.

Attorney General
Eric Holder is staying, at least for now.

Ken Salazar has announced his desire to leave office in March.  President Obama has yet to nominate a successor.

Tom Vilsack has not announced his second term plans, but appears to be staying, at least for the time-being.

This has been the most difficult cabinet position for President Obama.  Gary Locke, Obama's third nominee in his first term, finally took office in March of 2009, but stayed only 2 and a half years, basically competing the census and then departing.  Obama's second Commerce Secretary, John Bryson, lasted a mere 8 months, resigning after a bizarre incident involving a hit-and-run car accident and a stroke.  For the past 8 months, Rebecca Blank has been acting Commerce Secretary, awaiting an appointment and confirmation.  President Obama has yet to nominate a new Commerce Secretary.

Hilda Solis has already left office on January 22nd, leaving the post open.  President Obama has yet to name a replacement and most of his top picks from the world of labor are sure to generate controversy from Republicans.

Health and Human Services
Kathleen Sebelius appears to be staying, at least for now.

Housing and Urban Development
Shaun Donovan appears to be staying, at least for now.

Ray Lahood is still in office but has announced his intention to leave when a successor can be confirmed.  President Obama has yet to name a successor.

Stephen Chu just announced this week that he will also be stepping down.  President Obama has yet to name a successor.

Arne Duncan appears to be staying, at least for now.

Veterans Affairs
Eric Shinseki appears to be staying, at least for now.

Homeland Security
Janet Napolitano appears to be staying, at least for now.

So, to wrap it all up, of the 15 federal departments (I'm excluding "cabinet-level" positions that do not run a federal department) here is where President Obama stands:

Staying on from First Term: 7 (Justice, Agriculture, Health & Human Services, Housing & Urban Development, Education, Veterans Affairs and Homeland Security)
Nominee Already Confirmed: 1 (State)
Nomination Made But Not Yet Confirmed: 2 (Defense, Treasury)
Nominee Yet-To-Be-Named: 5 (Interior, Commerce, Labor, Transportation, Energy)

Clearly, the President has some work to do to rebuild his team.  This is doubly important given the significant budgetary changes to these departments likely to come down the pike with both sequestration and the continuing resolution battle in March.  Having interim leaders is not the best way to go ever, but is particularly bad when there are big changes coming.

Expect a flurry of nominations in the next few weeks as well as a lot of hearings and votes on nominees.  The President has named his most critical team (generally State, Defense, Treasury and Attorney General are considered the most critical positions in the cabinet), but there is much work left to do on the rest of the team.

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