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The Democratic Strategist

Political Strategy for a Permanent Democratic Majority

Month: January 2014

Marshall: investments and Entitlements

This post from Will Marshall, president of the Progressive Policy Institute, is the seventh contribution to the joint American Prospect/Democratic Strategist forum, Progressive Perspectives on the Future of the New Deal/Great Society Entitlement Programs. It is cross-posted from the Prospect.
Having rolled the rock of entitlement reform up Mt. Sisyphus more than a few times over the last decade or so, I know it’s important to begin with the obligatories. I prefer to define the challenge as “modernizing social insurance” but in truth such semantic fine-tuning doesn’t make the politics of reform easier. Any suggestion that Medicare and Social Security need fixing touches the rawest of liberal nerves. It’s seen as sacrilege – literally, as Vice President Biden might say — by votaries of the programmatic status quo. This quasi-religious fervor has never made much sense to me, given the utterly pragmatic and experimental spirit in which FDR conceived Social Security. Nonetheless, let me say for the record that I’m reasonably fond of Social Security, Medicare and Medicaid and, far from compassing their destruction, would like to see them reformed for the benefit of my children and theirs.
So what’s the problem? Leaving aside some lesser flaws and anachronisms – including the fact that the basic Social Security benefit isn’t generous enough — the big entitlement programs present us with two large dilemmas. As currently structured, they squeeze out public investment and they create generational inequity. This post focuses on the former, economic problem, because it tends to get less attention than the distributional problem. Since the government’s resources are always going to be finite, it’s important that it strike a sensible balance between spending that supports present consumption and public investment that makes Americans more productive and competitive down the road. Today the balance is badly out of whack.
Regardless of where they stand on entitlement reform, most progressives agree that jobs and economic growth should take precedence over austerity. What I think many are missing is the link between constraining the growth of social insurance costs and a stronger economy. America is stuck in a slow growth trap. Since 2000, the economy has averaged less than 1.8% GDP growth a year, its worst performance since before World War II era. The slowdown in job and GDP growth, as well as middle class wage stagnation, began before the recession-cum-financial crisis of 2007-2008.
The basic problem, in other words, is structural. Due mainly to lagging business investment and innovation, eroding competitiveness, and skill shortages, our economy has lost its productive mojo. Americans have grown accustomed to consuming more than they produce, and borrowing to make up the difference. Federal spending priorities have reinforced this consumption bias. Since the 1960s, Washington has been channeling an ever-rising proportion of the revenues it raises into consumption, especially of health and retirement benefits, while the portion of the budget devoted to economic and social investment has shrunk.
Feeding this dynamic is the inexorable growth of automatic, formula-driven spending on older Americans. Such “mandatory” spending now accounts for 60% of the nation’s budget. Meanwhile, discretionary spending (excluding defense), has fallen to just 17 percent. (In 1962, the ratio was roughly reversed: Discretionary spending (including defense) 67% percent of federal spending, mandatory spending 26%.) With most of federal spending on autopilot, the domain of democratic deliberation, where our elected representatives debate the nation’s needs, decide which priorities are worth funding and figure out how to pay for them, keeps shrinking. Lawmakers oversee a dwindling portion of the nation’s income and outgo, most of which already has been pre-committed to the big entitlement programs by politicians who are long dead.
I can think of many things to call this “crowding out” phenomenon, but progressive is not one of them. After all, domestic spending supports priorities liberals once fought and bled for. These include common goods like transport, water, and other vital infrastructure that supports economic growth; our national commitment to science and technology, perhaps our prime source of comparative advantage in global competition; and, the public education and training institutions that make “equal opportunity” more than a hollow slogan. Also being starved are progressive programs to help people lift themselves out of poverty, curb hunger, and expand early learning opportunities for families that can’t afford costly day care, not to mention environmental protection, public health and law enforcement.
Medicare and Social Security, which alone account for more than 37% of federal spending, are on track to absorb (along with interest on the debt) almost every dollar of revenue Washington collects over the next several decades. Meanwhile, the Urban Institute estimates that federal spending on children will decline about 20 percent over the next decade. This growing disparity seems perverse at a time when poverty rates are higher for children than seniors (18 versus 14.8 percent in 2012, as measured by the Supplemental Poverty Measure). From the standpoint of investing in children and families, uncontrolled mandatory spending on seniors is like a fiscal version of the Doomsday Machine from Dr. Strangelove.
The fiscal skirmishing in Washington has aggravated this systematic whittling down of public investment. Since 2011, the Obama administration and Congressional Republicans have agreed to nearly $4 trillion in debt reduction over the next decade. Of the $2.7 trillion in savings thus far (excluding the effects of the odious “sequester” in future years), $1.55 trillion has come from spending cuts, $700 billion in new revenues from the fiscal cliff deal, and about $450 billion in interest savings. In other words, for every dollar in new revenue, lawmakers have cut spending by $2, and almost all of that has come out of the hide of domestic spending.
This is the inevitable consequence of twin ideological obduracies – the GOP’s anti-tax fanaticism and Democrats’ denial of the need to align social insurance with the inescapable reality of an aging society. And it suits conservatives just fine. Before the Murray -Ryan budget deal softened the sequester’s bite (for two years anyway) The Wall Street Journal‘s Stephen Moore chortled over the sequester’s “success:”

The sequester is squeezing the very programs liberals care most about – including the National Endowment for the Arts, green-energy subsidies, the Environmental Protection Agency and National Public Radio. Outside Washington, the sequester is forcing a fiscal retrenchment for such liberal special-interest groups as Planned Parenthood and the National Council of La Raza, which have growth dependent on government largess.

One reason enough Republicans voted to partially suspend the sequester is that it will also eviscerate defense spending. There was a time when the GOP identified itself as the part of national strength and “resolve” expressed through more military spending. Today Tea Party types and libertarians apparently feel more threatened by the federal government than by America’s enemies.
Of course, progressives could avoid a zero-sum conflict between entitlements and domestic programs by borrowing more money or hiking taxes. Unfortunately, either expedient collides with economic and political reality. More borrowing would propel the national debt to 100 percent of GDP and beyond, driving up interest and shrinking the “fiscal reserve” we’ll need to combat future downturns. Given the halting recovery, big tax hikes now are economically dumb as well as politically infeasible. Many liberals have convinced themselves that the entitlements can be made solvent as the boomers surge into retirement simply by raising the payroll tax. This is probably the least progressive “solution” imaginable. By making labor more expensive, it would discourage employers from hiring workers, especially young and low-skilled ones. And it would transfer more wealth from young workers to retirees.
What progressives ought to do instead is strike a more equitable balance between mandatory and domestic spending (if not eliminate the distinction altogether by bringing entitlements on budget). Yet when President Obama dared to endorse “chained CPI,” a more accurate inflation measure that would reduce cost-of-living adjustments for Medicare and Social Security recipients, he was instantly flamed by lefty activists. Declared Stephanie Taylor of the Progressive Change Campaign Committee:

You can’t call yourself a Democrat and support Social Security benefit cuts. The president is proposing to steal thousands of dollars from grandparents and veterans by cutting cost-of-living adjustments, and any congressional Democrat who votes for such a plan should be ready for a primary challenge.

Will Democrats allow themselves to be intimidated by such reactionary liberalism, as Republicans now cower before Grover Norquist and the Club for Growth? If progressivism means anything, surely it’s a commitment to adapting old policies and programs to new economic and social realities. As custodians of America’s venerable social insurance programs, progressives are responsible for ensuring they work for future generations as well as for past ones. Today that means making the Big Three solvent amid an unprecedented demographic bulge; rebalancing the intergenerational compact to avoid putting unjust financial burdens on the young; and shifting public resources from consumption – especially by well-off retirees – to investments aimed at accelerating growth and social mobility.

Presidential Executive Order Good Strategy, Puts Obama in Very Good Company

At Talking Points Memo, Josh Marshall flags a big goof from one of the talking heads on MSNBC’s ‘Morning Joe’ who probably should have known better:

Jon Meacham says Lincoln and FDR never tried to “rebuild America on an Executive Order” like President Obama is supposedly proposing to do. Really? There are real issues with excessive reliance on executive orders. But I think someone needs to crack a history book and maybe find some better examples since Lincoln probably relied on executive powers (like ending slavery by executive order in most of the United States) more than any president in the country’s history (it’s still pretty controversial) and FDR is a close runner-up. Eeesh. This is an amazing thing for someone who presents himself as Mr. History and longivew to say…

Marshall links to another TPM post, by Tom Kludt, who elaborates:

Meacham’s take was somewhat baffling. Franklin Delano Roosevelt issued more executive orders than any president –3,522 to be exact and 1,719 more than the next closest president — including several that helped usher in New Deal programs. And Abraham Lincoln, of course, issued a pretty famous executive order known as the Emancipation Proclamation.

Obama gets the GOP to blast him for strategy used by two of America’s greatest presidents to achieve historically-acclaimed reforms — not too shabby.

Schmitt: “Entitlements” Are Just a Budget Category

This post from Mark Schmitt, director of the political reform program at the New America Foundation, is the sixth contribution to the joint American Prospect/Democratic Strategist forum, Progressive Perspectives on the Future of the New Deal/Great Society Entitlement Programs. It is cross-posted from the Prospect.
To think clearly about “entitlements” and their role in social policy, we need to strip away the moral and emotional barnacles that have attached themselves to a simple word describing a budget category. Entitlements differ from other government spending in only one way: The amount spent is determined by the rules of the program (who is eligible, what benefits are promised) rather than by the amount set by Congress each year. Changing their costs requires changing the rules, and the projected savings may not materialize for years, which creates the need for long-term budget plans.
But the word has long been freighted with more significance than it merits. Remember the welfare reform fights of the mid-1990s, when “ending the entitlement to welfare” was the one non-negotiable position of conservatives? The implication was that individuals had been “entitled” to welfare benefits regardless of their behavior, and that ending the entitlement would force those individuals to adopt “responsibility.”
In reality, individuals never had an automatic entitlement to benefits. States could and did cut off or reduce benefits for almost any reason at all, including having an additional child while on welfare or failing to seek work. It was an “entitlement” only because of the program’s budget structure – states got money from the federal government calculated as a percentage of their own spending on welfare. And after 1996, and continuing today, when the “entitlement” had been ended, states still get money from the federal government, but now as a fixed amount –a scheme that Senator Marco Rubio recently proposed to apply to almost all federal social programs. The alternative to “entitlement” wasn’t “responsibility.” Because entitlements are a budget category, the alternative was a different budgetary approach, one that showed its fatal weakness in the long recession.
Something similar, in reverse, has happened on the left during the period after President Obama moved toward embracing a budgetary “grand bargain,” in 2011. Entitlements have been elevated from a budget category to a moral cause. Throughout the spring of 2013, I got emails from organizations such as the Campaign for America’s Future, all imploring me to sign petitions demanding that Obama stay away from Social Security, Medicare and Medicaid in any budget negotiation. More than two million people signed. (I wasn’t among them.) Why should the big three entitlements be untouchable, and not all the other programs – K-12 and higher education, nutrition, housing, energy research – that were cut and cut again over the last three years, and, that, in total, are now at the lowest level as a share of GDP since the Eisenhower years? And shouldn’t there be more to the liberal message than just, “Don’t touch entitlements”? While the big entitlements provide economic security, they do very little to address “predistribution” – that is, incomes, opportunities, and working conditions.
The liberal devotion to the big three entitlements has two roots. One is the widely accepted assumption that only programs that are universal, or that “benefit a broad, cross-class constituency,” as Harvard political sociologist Theda Skocpol put it in her 1993 book, The Missing Middle, can attract lasting political support in the U.S. Medicare, Social Security, and to a lesser extent Medicaid (which pays the nursing home bills for millions of middle-class families) meet that criteria. The corollary is the aphorism, “programs for poor people are poor programs,” attributed to the English social researcher Richard Titmuss. Broad support for an active federal government depends almost entirely on these near-universal programs, this argument holds, and without them, voters would perceive most government programs as for poor people or minorities. The recent focus on “the 99%,” which creates a cross-class narrative by suggesting that almost all Americans have suffered while the top 1% has made huge gains, is correct about the takings of the super-rich, but also obscures the enormous difference in living standards between those in the top half of the 99%, and the 40% of households in or near poverty, who gained almost nothing during the decade before the economic crash.
But there’s plenty of evidence, especially from the subsequent twenty years, that casts doubt on Skocpol’s thesis. The State Children’s Health Insurance Program (CHIP), enacted in 1997, serves only low-income working families, but has been extraordinarily popular. Republican efforts to cut the program in 2006 hurt them in that year’s elections, Bush’s vetoes of CHIP expansion were unpopular (polling showed 72% support for the program), and Obama signed a long-delayed CHIP expansion on his 14th day in office. Tax credits for low-income families, education programs, and many other benefits that don’t reach a broad cross-class constituency have been resilient and popular. Perhaps this is because children are involved, perhaps it’s because they are seen as rewarding work or responsibility, or perhaps it’s that the programs are perceived as benefiting low-income whites as well as minorities. Whatever the reason, targeted programs aren’t always political losers. Unconditional cash transfers to poor adults, without regard to work, may still be a tough sell, but many other mechanisms to lift the economic prospects of the poor have proven popular and resilient. The more recent Republican effort to decimate the Food Stamp program, now known as SNAP, which seems to have levels of public support comparable to CHIP, will provide a further test of the proposition that programs that are not universal are uniquely vulnerable.
There’s a second, more tactical, reason that liberals are tempted to treat entitlements as untouchable. In 2005, when George W. Bush, relishing his narrow reelection to the presidency, declared that “I have political capital and I intend to use it” to push through privatization of Social Security, Democrats and liberals panicked, but soon figured out that the only response was no response. Resisting the temptation to offer their own alternatives to Bush’s privatization plan, such as the well thought-out package of fixes assembled a few years earlier by economists Peter Orszag and Peter Diamond, they stopped the process in its tracks. And that was a smart call, because in earlier negotiations on the “No Child Left Behind” education initiative, Medicare coverage for prescription drugs, and an energy bill, progressives had negotiated in good faith and moved the legislation forward, only to be cut out of the final deal.
The lesson to take from that episode is not “never touch Social Security.” It should have been, that on any issue, you should not negotiate with people who operate in bad faith, when you don’t have enough power. Social Security has been changed 30 times since it was created, often by Democrats, including Franklin Roosevelt himself. With a Democratic president and Senate that are committed to the basic concept of Social Security, changes such as a switch to Chained-CPI (a plausible method of calculating cost-of-living increases floated in 2013 that would have a small effect for most recipients, but a larger one for the very old) should be considered on their own terms, and in the context of other changes, not rejected out of hand because every detail of Social Security is sacred.
Each entitlement program is its own story. Social Security can be improved in dozens of ways, some of which would improve the long-term projected trust-fund balance and others of which might not. (Everything regarding entitlements in the budget is a matter of projections, which are a lot shakier than they seem, since they’re subject to assumptions about economic growth, population growth, and inflation. Still, Social Security projections are a lot sounder than projections for Medicare and Medicaid.) Instead of focusing on Social Security in isolation (or, worse, in the context of “entitlements”), we should look at the crisis of retirement savings for most Americans. There are a number of good small solutions, such as automatic enrollment in 401(k) plans, universal 401(k) plans, or a new system of private accounts, perhaps with a match for lower-income workers, grafted on to Social Security. But the more you look at the reality of work and retirement, in which ever fewer workers will have secure pensions, the clearer it becomes that the most efficient and even the most modern way to secure retirement is simply by expanding Social Security. This would require another level of financing as well, and possibly some benefit cuts in some areas, such as for higher earners, making the program slightly more redistributive. Resistance to any cuts in Social Security should not inhibit these initiatives.
Medicare and Medicaid, on the other hand, we should be desperate to cut. We should not aim to cut eligibility or coverage, but total costs. If, as current projections suggest, Medicare spending were actually to reach 5.6% of GDP by 2035, that would be an extraordinary level of spending in a sector that is generally not adding much productive capacity to the economy, and it would be propping up a level of total spending on health care in the U.S. that is 2.5 times the average of developed countries, with little to show for it. It is not a question of Medicare “going bankrupt.” Rather, Medicare and Medicaid, now joined by the Affordable Care Act, can provide invaluable leverage against overall health inflation, and we shouldn’t be afraid to use them. Fortunately, even without a budget bargain, the Obama administration has succeeded in putting measures in place that are likely to reduce Medicare, Medicaid, and overall health spending, against massive Republican resistance. As these dozens of experiments begin to show results, we should be willing to move quickly to expand those that work to reduce public health-care costs, even if the results won’t be fully captured in the projections of the Congressional Budget Office for some time.
Other participants in this forum are likely to argue that my initial premise – that holding entitlements untouchable has come at the expense of other spending and investment – is a false one, that there’s not a fixed federal budget that’s allocated between these two categories. That’s true, and some earlier efforts to mobilize children’s advocates and others against the entitlement programs on the grounds that they were “squeezing out” investment in kids were indeed efforts to split the progressive base. In theory, we can have plenty of both. But after three years of budgetary trench warfare, in which Republicans don’t budge from blind opposition to tax cuts, and Democrats hold entitlements off the table, the results are quite clear – one category remains vulnerable, and it’s no accident that non-defense discretionary spending is now on track to reach just 2.9% of GDP in a few years. That’s the lowest level for that budget category in more than half a century and barely half of the peak, in the early 1980s. Anything progressives can do to break this cycle of cuts to domestic spending and investment, which really does represent theft of economic potential from the future, we should embrace. And that starts with treating the big entitlements as what they are: a budget category, not a sacrament.

Political Strategy Notes

Mark Blumenthal and Ariel Edwards-Levy explain why we shouldn’t take instant poll reactions to the SOTU very seriously. And despite the impressive audience for the SOTU, I find it hard to disagree with Charlie Cook’s take.
Paul Krugman has a gem of a blog post “Obama and the One Percent,” noting “…there’s a danger, especially for progressives, of confusing the proposition that Obama’s billionaire haters are stark raving mad — which is true — with the proposition that Obama has done nothing that hurts the plutocrats’ interests, which is false. Actually, Obama has been tougher on the one percent than most progressives give him credit for…the one percent does have reason to be upset. No, Obama isn’t Hitler; but he is turning out to be a little bit of FDR, after all.” How he gets there is worth the read.
At NBC Politics Domenico Montanaro’s “Christie numbers tank as scandals continue” pegs the NJ Governor’s favorable ratings at 22 percent in a new NBC News/Wall Street Journal poll.
Regarding the weak responses of Republican governors to the weather disaster in the southeast endangering tens of thousands, the finger-pointing has begun. Jim Galloway reports at the Atlanta Journal Constitution that GA Republican Gov. Nathan Deal “opened a late-night press conference on Tuesday with this: “As you know, we have been confronted with an unexpected storm that has hit the metropolitan area.” Galloway quotes Marshall Shepherd, president of the American Meteorological Society: “Meteorologists from the National Weather Service (NWS) in Atlanta issued Watches and Warnings BEFORE the event and provided ample time for decisions to be made. Yet, as soon as I saw what was unfolding with kids being stranded in schools, 6+ hour commutes, and other horror stories, I knew it was coming…Some in the public, social media or decision-making positions would “blame” the meteorologists. I began to hear things like…”there were no Watches or Warnings until snow started falling or “weather is just unpredictable.” Wrong, Wrong, Wrong, and Wrong!” Gov. Deal’s weak management of the emergency relief effort could be a potent message point for Democratic candidate for Governor Jason Carter in the north GA suburbs.
Yet another important victory for VA Democrats. As Laura Vozella puts it at the Washington Post, “Democrats prepared to seize control of the Virginia Senate on Monday after winning a recount by just 11 votes in a razor-thin special election, giving Democratic Gov. Terry McAuliffe’s first-year agenda a crucial boost.”
In the comments following Politico’s “The Case Against Early Voting” by Eugene Kontorovich and John McGinnis, a commenter named “Jane” responds, “The article also seems to conflate extremely long periods of early voting with early voting in general; as the article suggests, a voting period of one to two weeks certainly wouldn’t interfere with the debate schedule, as the candidates would have ample time to debate whichever issues they wished in the preceding months, and it is..I would simply like to remind the authors of the lines in Ohio precints during the ’08 and ’12 elections, and to consider how many people gave up and went home, despite being in a fiercely contested state, simply because they didn’t have time left in the day to exercise their right to vote; isn’t that more likely to sway an election? Early voting is the simplest and easiest solution to address this problem, even if it is an imperfect answer – if other proposals cannot find support and be enacted before midterm elections, we should settle for expanding early voting to all precincts.”
The Nation’s Ari Berman reports on “The New Nullification Movement: Some states are reviving disenfranchisement schemes that date back to the antebellum South.”
But it’s not only the south. Cincinnati City Councilman P.G. Sittenfeld posts on “The Subtle – And Not-So-Subtle – Strategies of Voter Suppression” at HuffPo, noting the gamesmanship that goes on in selecting early voting poll locations even in Ohio: “The proposed relocation would place in-person early voting at a site far removed from downtown with severely less access by public transportation. Whereas the current downtown location of early voting has greater bus connectivity than any site in the entire County, for the vast majority of riders the new location would require any combination of long commutes, bus transfers, hour-long waits to catch the next bus, and half-mile walks from where the bus line ends.”
In a NYT op-ed Ezekiel J. Emanuel eviscerates the GOP’s long awaited “alternative to Obamacare.”

Why Whining About Obama’s SOTU Initiatives Won’t Help GOP

Re MSM denial about the need for executive action, Greg Sargent says it well at The Plum Line:

Few pundits have been willing to reckon directly with the fundamentals of GOP obstructionism. A real reckoning would acknowledge that implacable GOP opposition to the Obama agenda, which began when the country was facing a dire, open-ended economic emergency, has for years been rooted in a combination of deliberate strategic choices and structural factors that have created a deeply unbalanced, unconventional situation. Commentators refuse to deal seriously with all of this — even though it is the actual cause of the very paralysis and dysfunction they regularly claim consternation about — and it will probably be absent from discussions of whether Obama’s planned executive actions are defensible

As for public opinion regarding Republican proclivities for bipartisan cooperation, Sargent explains:

…The new NBC/WSJ poll, for instance, finds that a majority of Americans, 51 percent, believe Republicans will be “too inflexible” with Obama, while only 25 percent say they have the balance right (one wonders about the faculties of the 17 percent who say Republicans have been “too quick to give in” to the president). By contrast, only 39 percent say Obama has been too inflexible with Republicans….Yesterday’s Pew poll found that by a huge margin of 52-27, Americans say Dems are more willing than Republicans to work with the opposition. While the GOP holds a narrow lead on the economy, it also found lopsided Dem advantages on which party is viewed as extreme and which party is more concerned with ordinary people — suggesting, again, awareness of the basic imbalance…Beyond all this, let’s remember that the minimum wage hike is popular – and Congressional Republicans aren’t.”

Republicans can whine all they want. But the public gets it, and it’s hard to see how the GOP’s complaining about popular — and much-needed — executive order is going to win them any swing voters in November.

Baker: Fiscal Policy, the Long-Term Budget, and Inequality

This post from Dean Baker, co-director of the Center for Economic and Policy Research in Washington, D.C., is the fifth contribution to the joint American Prospect/Democratic Strategist forum, Progressive Perspectives on the Future of the New Deal/Great Society Entitlement Programs. It is cross-posted from the Prospect.
The American Prospect deserves credit for sponsoring this forum. It gives progressives an opportunity to engage in a serious discussion about many of the key economic, social, and political issues facing the country. At least as important, it allows us to tie them together in a way that generally is not done but is essential in a serious discussion.
Asserting that budget policy, fiscal policy, and inequality are integrally linked is not just rhetoric. In fact, they are inextricably tied through economic relations that are too little appreciated. The failure to appreciate these ties often leads to policies that are ineffective or even self-defeating. This essay describes how the policies are necessarily linked beginning with fiscal policy and macroeconomic policy. It then turns to a discussion of social insurance programs and inequality and the long-term budget.
Macroeconomics and the Iron Truths of Accounting Identities
Most college-educated people have been through an intro econ class where they were punished with the basic macroeconomic accounting identities. They then quickly forget them as soon as the class was over. Unfortunately, this appears to be as true for people engaged in economic policy debates as for the larger public.
The good or bad thing about accounting identities is that there is no way around them: They must be true. One of the basic macroeconomic accounting identities is that net national savings must be equal to the trade surplus. This means that the total of private and public savings, net of investment, must be equal to the trade surplus. For algebra fans this means that:
(S -I) + (T-G) = X-M;
Where S is the sum of all private savings, both household and corporate. I is investment, which means both corporate investment and the construction of residential housing. T is taxes and G is government spending, so T-G means the budget surplus. (Since we have been running large deficits in recent years, T-G has been negative.)
X is exports from the United States, while M is imports into the United States. This means that X-M is the trade surplus. This number has also been a large negative in recent years, as the country has been running a large trade deficit.
I apologize for the detour to intro macro, but it is important that people understand the logic of this accounting identity. If the country has a trade deficit, then it means we have negative national savings. There is no way around this fact.
If we have negative national savings then either the government must have negative savings, the private sector must have negative savings, or both sectors can have negative savings. Again, there is no way around this fact.
Currently our trade deficit would be between 4-5 percent of GDP if the economy were at full employment. This comes to $650 billion to $800 billion a year in the current economy. This means that the budget deficit, plus whatever negative savings we see on the private side, must sum to between $650 billion to $800 billion.
If the deficit hawks got their dream and we somehow balanced the budget, and the trade deficit stayed the same (I’ll come back to this), then it would mean that the private sector would need to have negative annual savings of between $650-$800 billion. In most of the post-war period private sector savings have been close to zero, with households providing the savings businesses needed to finance investment.
The two notable exceptions were during the years of the stock bubble at the end of the 1990s and the housing bubble in the last decade. In both cases household savings plummeted as the wealth generated by the two bubbles led households to increase their consumption at the expense of their savings. Both bubbles also led to an increase in investment. In the stock bubble years, the uptick was in corporate investment. In the housing bubble years, residential construction reached post-war highs measured as share of GDP.
It is difficult to imagine that anyone would actually advocate bringing back bubbles to sustain the economy. Furthermore, since their main impact was on boosting consumption at the expense of savings, one result of the bubble driven growth of the last two decades was that households did not save as much as they would have otherwise, leaving them less well prepared for retirement. That can hardly be a desirable outcome.
The alternative way to have negative savings on the private side is to have an investment boom. That might be wonderful, but that is not a story for the real world. The investment share of GDP has varied little over the last 50 years. Even at the peak of stock bubble years, when concerns over the Y2K problem spurred software investment and people threw money at every crazy Internet start-up, non-residential investment rose by just 1.4 percentage points above its 12.7 average share of GDP over the past 40 years.
If we can’t expect private savings to turn negative in a big way, and we keep the government budget balanced, then there is one other way for the income accounting identity to hold. If the economy shrinks due to insufficient demand, then savings will fall more than investment. At some point, this will give us a large enough excess of private investment over private savings for the national income accounts to be in balance. 
If it is not clear, we are bringing the national accounts into balance in this story with a shrinking economy and rising unemployment. That is what happens if we run a balanced budget in the context of having a large trade deficit. The deficit hawks may yell and scream that they don’t want to shrink the economy and have mass unemployment, but this is what they will get if we have deficit reduction without a clear plan for reducing the trade deficit.
Of course, the trade deficit is not a law of nature. The trade deficit exploded in the years following the East Asian financial crisis. It fell back substantially in the years from 2006 until the recession. The main factor in both cases was changes in the value of the dollar: first a sharp rise following in the wake of the crisis and a gradual decline in the years after 2002. The trade deficit clearly responds to changes in the value of the dollar. The high dollar that we saw after the East Asian financial crisis made U.S. goods less competitive in the world economy. When it fell back to more normal levels, the trade deficit began to shrink.
Many actors in policy debates have argued for alternative methods of reducing trade deficits, such as new trade agreements or industrial policy. In fact, the former have often increased the trade deficit. Well-designed industrial policy can raise productivity and increase competitiveness, but even in a best-case scenario this is a long-term outcome. Even with optimistic assumptions, currency adjustments will swamp the plausible impact of industrial policy.
This means that if we want to see a substantially lower trade deficit, we should want to see a lower valued dollar. This should be front and center of every progressive’s agenda.
If we don’t see a drop in the dollar, then we should anticipate that the large trade deficit persists. In this case, our alternatives are large budget deficits or unemployment. That’s it: Those who are not prepared to push for a lower valued dollar and also want a balanced budget, want more unemployment. 
Flipping this over, we can attain full employment by running large budget deficits. Given the size of the current trade deficit, budget deficits of the size needed to bring the economy back to full employment would probably be in the neighborhood of $1 trillion a year or 6 percent of GDP. The U.S. government can certainly run deficits of this size for a very long time.
In the downturn financial markets have shown little reluctance to hold U.S. government bonds at extraordinarily low interest rates, in fact the real interest rate on long-term bonds has been close to zero. This makes borrowing for both short-term stimulus and longer-term investment measures attractive. This would mean not just physical infrastructure (including retrofitting buildings to make them more energy efficient) but research and development in a wide range of sectors.
Since the main point is to stimulate demand, we can also experiment in various areas. For example, we could allocate money to allow some cities to offer free bus fares for two years. It would be interesting to see the extent to which bus travel can be encouraged if it were simple, quick, and free. The potential reduction in greenhouse gas emissions would be substantial.
We could also use public funds to encourage shorter work weeks/work years. It is important to realize that our central problem right now is too much supply, not too little. Traditional stimulus addresses this problem by increasing demand. We can also address the problem by giving employers an incentive to reduce work hours in family friendly ways. We work 20 percent more hours on average than do people in Western Europe. If our work years were comparable in length to those in Western Europe, unemployment would be immediately eliminated. 
Of course such a transition could not be accomplished overnight, but there is no reason that government funds could not be used to provide incentives for shortening work hours with policies like paid vacations, paid family leave, and paid sick days, rather than paying workers unemployment benefits. There is already a short-work program attached to the unemployment insurance system in 25 states (including New York and California), but the take-up rate on this program is low. If the problem is that we don’t want all the goods and services that we are capable of producing then a simple answer would be to produce less and let people share the leisure. 
If this discussion seems dismissive of deficit concerns, it is because it is based in economic logic and not Washington generated hysteria. We are not and cannot be Greece. That is not a subjective assessment of the relative strength of the U.S. and Greek economies, where we could turn out to be Greece at some point in the future. It is a statement about the fundamental differences in our currency regimes.
The United States has its own currency. Greece does not. If we actually saw the investor panic that the Washington deficit hawks crave, we could always have the Federal Reserve Board just buy up U.S. debt. Greece did not have this option with the euro. This could create inflation, but only in a context where the country was seeing a serious problem of excess demand – too many dollars chasing too few goods and services. Inflation does not just drop out of the sky.
This means that the idea that we have to fear investors turning on a dime and running from the dollar is nonsense. We could envision scenarios in which we overheat the economy and have serious problems with inflation, but that will not happen overnight and it certainly will not happen in a context where we are 9 million jobs below the trend level of employment as is the case presently.
There is one other crucial point about the need to get to full employment. Low levels of unemployment disproportionately benefit those in the bottom half, and especially the bottom third of the income distribution. There is no better policy than to ensure that those at the middle and bottom share in the gains of economic growth. In fact, the decision to have fiscal and monetary policies that do not bring the economy to full employment can be viewed as a decision to run policies to redistribute income upward, since that is their clear effect.
Long-term Budget Deficits and Social Insurance
While there may be no reason to worry about the budget deficit in the near or even intermediate future, the longer-term projections showing large deficits should provide some cause for concern. It is worth noting that even these longer term projections show much smaller deficits now than they did a few years ago due to the slower projected pace of health care cost growth. Nonetheless there are still substantial, if manageable increases in spending projected over the next two decades. The main sources are, of course, Social Security and Medicare.

Political Strategy Notes

NYT columnist Paul Krugman has a message suggestion for President Obama’s Tuesday SOTU: “There’s an enduring myth among the punditocracy that populism doesn’t sell, that Americans don’t care about the gap between the rich and everyone else. It’s not true. Yes, we’re a nation that admires rather than resents success, but most people are nonetheless disturbed by the extreme disparities of our Second Gilded Age. A new Pew poll finds an overwhelming majority of Americans — and 45 percent of Republicans! — supporting government action to reduce inequality, with a smaller but still substantial majority favoring taxing the rich to aid the poor…of the two great problems facing the U.S. economy, inequality is the one on which Mr. Obama is most likely to connect with voters.
Yawn, as many do, at state of the union addresses. But Mike Dorning reports at Bloomberg.net that “Though the 33.5 million viewers Obama drew last year is half the number Bill Clinton had 20 years earlier, the address remains a major TV event, topping both the Emmy Awards and World Series in viewership.” And team Obama is putting a lot of digital muscle into leveraging the speech: “The speech, usually about an hour long, “is the biggest engagement of the year” for the White House’s digital media operation, said its acting director, Nathaniel Lubin…The campaign includes Google Hangouts and Facebook (FB) chats by cabinet members and senior administration officials, a flood of advance Twitter messages under the hashtag #InsideSOTU, and an “enhanced” web live stream of the speech with graphics and data amplifying Obama’s themes. As part of the build-up, speechwriter Cody Keenan did a one-day “takeover” of the White House’s Instagram Account featuring photos of preparations.”
For their part, NYT’s Jeremy W. Peters explains that the Republican response to Tuesday’s SOTU will be largely balkanized, with the official response from the relatively unknown Rep. Cathy McMorris Rodgers being drowned out by bomb-throwers like Ted Cruz, Rand Paul and Marco Rubio, who will be capering all over social media.
At CBSnews.com, Walt Cronkite’s “Schumer offers Democrats a strategy to defeat tea party” explains: “…in framing the debate with the tea party, Democrats should focus on four or five simple and easily explainable examples where government can help the average family. Schumer’s examples included: raising the minimum wage, assisting with college affordability, investment in national infrastructure, promoting equal pay for women, and ensuring America has fair trading relationships and isn’t exploited by countries like China.”
Although only 17 states and Washington, D.C. now approve same-sex marriage, that’s nine more than just a year ago. Further, regarding key bellwether states, WaPo’s Juliet Eilperin reports, “A decade after 62 percent of Ohio voters approved a constitutional ban on same-sex marriage, a recent Quinnipiac poll showed a narrow majority now backs gay-marriage rights…The changing political dynamics were on full display this week as Virginia Attorney General Mark R. Herring (D) announced he would not defend the state’s ban on same-sex marriage on the grounds that it was unconstitutional. Herring won a close election with strong support from gay-rights groups, and his decision infuriated conservatives, who accused him of violating his oath to uphold state laws.”
Re Michelle Nunn’s chances for picking up a U.S. Senate seat in GA for Dems: “Her campaign will test whether the rapidly changing demographics of Georgia — where state elections data show that the white vote dropped to 61 percent of the total in 2012 from 75 percent in 2000 — have shifted enough to return a Democrat to Washington. And it will reveal how much legacy still matters in politics. from Sheryl Gay Stolberg’s NYT article “Old Democratic Name (Nunn) Stakes Bid on Shifting Georgia.” Further adds Stolberg, “Two of his closest Republican friends, former Senators John W. Warner of Virginia and Richard G. Lugar of Indiana, are now donors to Ms. Nunn. Mr. Warner attended the breakfast, he said, and walked away impressed. So did Mr. Nunn; watching his daughter tackle military policy questions changed his view of her race…”That morning,” he said, “was when I said to myself, ‘Hey, she’s got as good a shot as anybody in this race, maybe better.’ “…If Ms. Nunn has a path to victory, Democratic strategists say, it will be by increasing minority turnout while attracting independent-minded whites, especially young voters and women. Democrats hope that a potentially fractious Republican primary, with eight candidates, will produce a far-right opponent whom Ms. Nunn could defeat.
Melanie Trottman of the WSJ reports a small gain for unions in the private sector during 2013.
At ThinkProgress Aviva Shen’s “Conservative PAC Targets Secretary Of States Who Won’t Back Voter Suppression Laws” alerts Dems to a new GOP focus: “A new conservative super PAC hopes to proliferate more voter suppression laws by pouring money into secretary of state races. The group, SOS for SoS, is looking to spend $10 million in nine states in support of candidates who will champion “smart voting,” such as restrictive voter ID laws, voter purges, and proof of citizenship requirements. Secretaries of state set elections procedures and can determine mundane but crucial aspects like voting hours, provisional ballot rules, and recounts…The announcement, per Politico, comes days after a judge overturned Pennsylvania’s hotly contested voter ID law because it could disenfranchise 750,000 voters. A Democratic counterpart, SoS for Democracy, launched in December to promote secretary of state candidates who are against voter suppression measures. Currently, 29 secretaries of state are Republican, while 21 are Democrat…A recent study found that states with higher minority turnout are more likely to try to pass voter suppression laws.”
At The Monkey Cage Alan I. Abramowitz crunches recent opinion data on reproductive rights explains why “Americans may be divided on abortion, but it won’t matter for the midterms”: “abortion could have been a major wedge issue in 2012 — potentially prompting defections among those whose views differed from those of their party’s candidates. But despite efforts by candidates in both parties to exploit divisions among the opposing party’s supporters, such defections were limited. Only a small minority of voters whose opinions on abortion conflicted with their own party actually voted for the opposing party’s presidential candidate. Moreover, these defections essentially canceled each other out. According to the data from the 2012 ANES, 17 percent of strongly pro-life Democrats voted for Mitt Romney, and an identical 17 percent of strongly pro-choice Republicans voted for Barack Obama. Neither presidential candidate gained a clear advantage from voter defections on the issue of abortion in 2012…This is likely to be true in the 2014 midterm elections, as well…” Moreover, adds Abramowitz, exceptions tend to favor Democrats: “In 2012, two Republican Senate candidates, Todd Akin in Missouri and Richard Mourdock in Indiana, lost what appeared to be very winnable races because of defections by Republican voters. According to state exit polls, Republican defectors outnumbered Democratic defectors by 21 percent to 4 percent in Missouri and by 20 percent to 7 percent in Indiana. It seems likely that Akin’s and Mourdoch’s outspoken opposition to abortion even in the case of pregnancies caused by rape contributed to these extraordinarily high defection rates among Republican voters and to their defeats.”

Galston: Thoughts On a Center-Left Entitlement Strategy

This post from Brookings Fellow and TDS Founding Co-Editor William Galston is the fourth contribution to the joint American Prospect/Democratic Strategist forum, Progressive Perspectives on the Future of the New Deal/Great Society Entitlement Programs. It is cross-posted from the Prospect.
In a forum such as this, authors can dispense with many of the usual preliminaries. I take it we agree that suitably structured and regulated markets generate wealth more effectively than other economic systems but do not reliably produce either a reasonable distribution of prosperity’s fruits or an adequate level of security against life’s physical and financial vicissitudes. It is for that reason, we agree, that since the 1930s the United States has developed a web of programs to assist the poor and vulnerable, to make work pay and provide protection against unemployment, and to ensure older Americans a decent retirement. We agree that these programs reflect necessary and important public purposes that government may legitimately pursue. We agree, therefore, that the task before us is not to disable or dismantle these programs in the name of other purposes but rather to improve them and to do our best to ensure their perpetuation for future generations.
When we move from principles to particulars, the arena for discussion is vast. I will focus my remarks on two of the largest programs, Social Security and Medicare. Means-tested and work-related programs pose different but no less important challenges, and I’m confident that other participants in this symposium will do justice to them. Nor will I deal with creative new ideas such as progressively structured retirement savings programs on top of Social Security, which I support.
A philosopher once remarked that if you truly will an end, you must also will the means to it. So let me begin with the most obvious point: unless economic output, employment, and wages grow at reasonable rates over extended periods, it will be impossible to finance programs that provide adequate income for retirees and protect them against devastating health care costs. For that reason, it is important to structure and finance entitlement programs so as to minimize potential negative impacts on growth and employment. For example, employers compare the marginal cost of adding workers to the gains at the margin that those workers could produce. In making that comparison, they look at total compensation, not just money wages. There are limits, then, as to how high payroll taxes (and health insurance premiums) can rise before they discourage employers from hiring.
There is a further consideration. I am not the only contributor to this forum, I suspect, who believes that economic and productivity growth require robust public as well as private investment. The list of pro-growth public investments is long and familiar, ranging from education and training to infrastructure and research. At some point, competition for public resources between investments and entitlement spending may develop. Indeed, it may be imminent. The Congressional Budget Office’s analysis of President Obama’s proposed FY2014 budget shows that while mandatory spending would rise slightly as a share of GDP between 2012 and 2023, discretionary spending would fall from 8.3 percent of GDP to 5.0 percent (even with the sequester replaced). CBO’s updated baseline projections, which assume current policy, put discretionary spending at 5.3 percent of GDP in 2023–the lowest level of discretionary spending relative to GDP since at least 1962. (The bipartisan budget deal struck in December changes budget authorizations for fiscal years 2014 and 2015 but has no impact on authorized spending in the out-years.) No one believes that we can adequately defend our country and assist low-income Americans and invest in the future with only 5 percent of our nation’s output. Something has to give.
Many progressives believe that what should give way is the current limits on government: the United States should do all of the above, raising taxes and expanding government as needed to fund and implement them. Setting aside potential political obstacles, there are some fiscal and economic considerations that warrant caution.
Most Americans believe that the U.S. public sector is substantially smaller than its European counterparts. In fact, the gap is relatively modest.
Most Americans believe that the U.S. public sector is substantially smaller than its European counterparts. In fact, the gap is relatively modest. According to the OECD, U.S. government expenditures totaled 41.7 percent of GDP in 2011, compared to 45.3 percent for Germany and 44.5 percent for Norway. To be sure, some OECD countries (France and Sweden, for example) spent substantially more, but others (Japan and Switzerland) spent less. Although the United States is a bit below average in public outlays, it is not a conspicuous outlier. The same is true for public revenues, which now total about 36 percent of GDP.
There are two reasons why we are inclined to believe otherwise. The first is our system of federalism. Compared to most other OECD countries, the United States conducts a high proportion of its public activities–nearly half, judged by outlays and revenues–below the national level. It’s a mistake to compare our federal government to the more centralized national governments of Europe. Second, more than half our health care expenditures are private, compared to only one-third for the OECD as a whole. If ours were the same as the rest of the developed world, the gap between the size of our public sector as a share of GDP and theirs would disappear. (To be sure, if more of our health care were in the public sector, it might cost less–as it does everywhere else.) None of this proves that we couldn’t increase the size of government and level of taxation without damaging the economy. But it does suggest that our room to maneuver is more constrained than is often thought.
Two other factors point in the same direction. As I argued above, to carry out core functions, discretionary spending in the coming decade would have to be about 2 points of GDP higher than the president’s budget calls for, bringing total federal spending to roughly 24 percent of GDP. And second, spending increases in Social Security and health programs are scheduled to accelerate sharply after the current ten year budget window ends. Between 2022 and 2037, according to the long-term budget scenario CBO regards as the most realistic, these large mandatory programs will increase from 12.9 percent of GDP to 16.6 percent, forcing us to choose between unsustainable deficits and a huge increase the federal tax burden–that is, unless we were willing to rein in the rate of increase in these programs.
The CBO analysis allows us to quantify these alternatives. Under their realistic scenario, federal spending before interest payments would be 26.1 percent of GDP in 2037, up from 20.7 percent in 2022. In the absence of tax increases, federal borrowing would surge, boosting federal debt from 93 percent of GDP to 199 percent, and interest on the debt from 3.7 percent of GDP to 9.5 percent. Conversely, we could stabilize the debt/GDP ratio at the 2022 level by enacting, that year, an annual increase in federal taxes that CBO estimates to be more than 6 percent of GDP. (In 2013 terms, that would amount to about $1 trillion.) Avoiding both these unattractive futures would require us to work out some balance between spending restraints and revenue increases.
Most Democrats hope that full implementation of the Affordable Care Act will slow the rate of increase in health care costs, not just for a few years but permanently. I hope so too, and I have no basis for saying that these hopes are futile. But even if the ACA exceeded expectations, it wouldn’t materially change the budget picture during the coming generation. Here’s why. First, CBO’s baseline scenario already assumes no excess cost growth (above the rate of growth in GDP) for Medicare. Second, between now and 2037, the aging of the population will contribute far more to increasing federal health care outlays than will rising health care costs per beneficiary. And finally, the aging of the population accounts for all the increase in Social Security outlays.
In short, the surge in spending for mandatory programs over the next quarter century is primarily driven by predictable, irreversible changes in the age structure of our population. Americans 65 and over now equal about 23 percent of working-age Americans between 20 and 64; by 2037 they will be about 38 percent. And federal spending on programs in which they participate will rise commensurately, even if medical cost increases magically subside to the rate of general inflation and remain there indefinitely.

Kuttner: The Real Social Insurance Crisis

This post from Prospect co-editor Robert Kuttner is the third contribution to the joint American Prospect/Democratic Strategist forum, Progressive Perspectives on the Future of the New Deal/Great Society Entitlement Programs. It is cross-posted from the Prospect.
There is a severe and deepening crisis in American retirement and health care. But it is not the one that has dominated the public debate.
The supposed crisis that has gotten most of the attention is the rising cost of “entitlements,” specifically Medicare, Medicaid, and Social Security–defined purely as a budgetary issue. But the true crisis is that an increasing percentage of Americans lack financial security in retirement and pay far too large a share of their incomes for health care. The Affordable Care Act addresses some of the health insecurity without fixing the deeper drivers of cost.
The two crises are related. The staggering inefficiency in the system by which we provide health coverage leads most Americans to pay too much for too little. Social Security is a highly efficient system, but the rest of the pension system delivers far too much to middlemen and far too little to the elderly. In both cases, a more efficient and public system would produce more adequate benefits at less overall cost. The emphasis on the purely fiscal challenge produces demands for program cuts and diverts attention from the deeper failures of the system.
The Fiscal Reality and its Politics
Ever since the election of 1992, fiscal conservatives in both parties–and in third parties–have tried to make the federal deficit a central political and economic issue. In a series of articles and books beginning in 1982, the billionaire investor and conservative activist Peter G. Peterson began warning that Social Security was heading for a crisis of insolvency, which in turn would crash the economy. Peterson underwrote the Concord Coalition and later created the Peter G. Peterson Foundation to spread the budget alarms. In the 1992 election, the third party candidate, H. Ross Perot, made the federal debt the centerpiece of his campaign and briefly ran ahead of both major party candidates in the opinion polls.
But in the 1990s, both the debt crisis and the alleged Social Security crisis evaporated. Outlays continued to grow throughout the Clinton era, from $1.409 trillion in FY 1993 to $1.863 in FY 2001, but revenues grew even faster.
Supposedly, fiscal restraint gave the bond markets confidence in lower inflation, which in turn reduced interest rates and powered the recovery. In reality, the only connection between reduced deficits and cheaper money was in Fed Chairman Alan Greenspan’s mind. A lower deficit gave Greenspan the political cover to cut interest rates. This was a political bargain with the Fed, not a necessary fiscal one, but prosperity returned.
Full employment in the late 1990s also increased the receipts coming into the Social Security trust funds, which are financed by payroll taxes. Social Security’s supposed day of reckoning, when it would no longer be able to pay all of its benefits, receded by 13 years in just seven years. In 2001, the federal budget was projected to be in surplus indefinitely, leading the Fed to worry how it would conduct monetary policy in the absence of Treasury securities to buy and sell.
What caused deficits to resurge under President George W. Bush had nothing to do with the aging of the population or the rising costs of social insurance and everything to do with two wars, two rounds of tax cuts, and the most severe financial collapse since 1929. But the economic crisis gave the supposed Social Security crisis a new lease on life, and once again calls were heard to cut Social Security outlays in the name of deficit reduction.
These calls, unfortunately, even reached the Obama White House. After a year of emphasizing public investment via the Recovery Act, Obama’s economic team advised him, prematurely, to pivot to deficit reduction. This led directly to the late and little lamented Bowles-Simpson Commission and put the President squarely in the camp of believers in the Grand Bargain that Pete Peterson and Robert Rubin had been promoting for decades: Cut Social Security and Medicare, come up with token tax increases that even Republicans can support, and the reduced deficit will restore confidence in the economy.
Three things were disastrously wrong with this medicine. It short-circuited the stimulus that the economy still needed (and needs). It put Obama on the side of austerity economics, which was ill advised as economics and bad as politics. And it undermined the clearest single issue differentiating Democrats from Republicans–the defense of Social Security and Medicare. When Obama’s advisers decided to claim more than a trillion dollars in unspecified savings in Medicare to fund much of the cost of the Affordable Care Act, the White House blurred those differences even further.
So the White House has repeatedly bungled the politics of defending America’s most valued social insurance programs. The Republican takeover of the House in the 2010 elections was one result. At this writing, Lake Research finds that 82 percent of all Americans oppose cuts to Social Security, including 83 percent of Democrats, 82 percent of Republicans, 78 percent of independents, and even 74 percent of self-described Tea Party members.
There are ways to shore up Social Security and reform medical care that don’t require taking income or services away from America’s elderly population. Before returning to those strategies, let’s take a closer look at how the elderly live.

Levison: When Public Opinions Collide

This post from the TDS Contributor Andrew Levison is the second contribution to the joint American Prospect/Democratic Strategist forum, Progressive Perspectives on the Future of the New Deal/Great Society Entitlement Programs. It is cross-posted from the Prospect.
A major problem that confronts progressives and Democrats in dealing with deficits, entitlements and jobs is the extraordinary degree to which American public attitudes seem almost systematically incoherent. This marks a profound change from public attitudes during the early post-World War II era when there was a wide consensus on two major pillars of the New Deal:
First, at that time there was wide popular support for active government intervention in the economy to prevent mass unemployment. On a “common sense” level this was expressed in the idea that government had a fundamental responsibility to prevent mass unemployment, a responsibility codified in the 1946 Employment Act, and whose implementation was often visualized in somewhat romanticized images of depression-era programs like the Civilian Conservation Corps, the WPA and other direct job creation programs. On a more sophisticated level the support for active government intervention was reflected in the general intellectual embrace of the version of Keynesian economics presented in Paul Samuelson’s textbook. In this policy paradigm budget deficits and government spending were viewed as part of “managing aggregate demand” and “using budget deficits as tools of economic policy.” In the public writings of Samuelson and other MIT Keynesians, a commitment to balanced budgets was derided as little more than a relic of a bygone era.
Second, there was widespread support for a government sponsored social safety net to provide a basic level of economic security. In the popular discussion this safety net included not only Social Security and unemployment insurance but also government support for advanced education through programs like the GI Bill and the right to form trade unions which provided many blue-collar workers with job security and significant health and retirement benefits. In popular speech this new level of economic security was described as “the American Dream”; in more elite discourse, it was termed the “modern mixed economy” or the “Affluent Society”
Today, in striking contrast, neither of these core elements of the post-war New Deal receives clear majority support. Instead, across a wide range of topics and issues, public attitudes seem almost willfully perverse, with opinion polls showing simultaneous support for ideas and policies that are often logically incompatible
Consider the following:
When choosing between supporting Social Security and Medicare vs. reducing the deficit, most Americans say “both.”
80 percent of the public, for example, agrees that it should be the government’s responsibility to “provide a decent standard of living for the elderly”. Yet at the same time, 85 percent of Americans think “reducing the federal budget deficit is a worthy goal in and of itself,” 77 percent think the cost of Social Security and Medicare will “create major economic problems in the next 25 years” and a majority believe that a “major overhaul of social security is necessary to substantially reduce the deficit.”
When opinion poll questions are more precisely formulated to require a direct choice between maintaining Social Security and Medicare benefits on the one hand and reducing the deficit on the other, however, the vast majority of polls do indeed show solid support for these two specific entitlement programs. On one recent poll, for example, 57 percent of Americans favored maintaining benefits for the two programs in contrast to only 32 percent who favored deficit reduction. Most polls find similar results.
But when the choice is made slightly more abstract and presented as one between reducing “government spending” in general versus deficit reduction, the results become a great deal more ambiguous. Asked if the government should increase taxes or reduce services to lower the deficit, in one poll 49 percent favored a conservative approach of reducing services while only 30 percent favored increasing taxes. Another poll found a refusal to choose: given a more specific choice between “cutting spending on entitlement programs like Medicare” or “increasing upper income taxes” only 18 percent endorsed cutting spending while 34 percent favored increasing revenues. The largest single group of the respondents, however, favored doing both at the same time.
In fact, the most common response to questions of this kind is for Americans to firmly refuse to make any hard or serious choices about how to reduce the deficit. On one recent survey, for example, 56 percent of Americans rejected raising taxes as a way to reduce the deficit but then an even larger 66 percent of the same sample also rejected cutting benefits. This same pattern of refusing to make clear choices is quite dramatically illustrated in the large number of polls in which people first emphatically claim that they want “a smaller government that does less” but then proceed to systematically reject cuts in virtually every major categories of government expenditure (except a few small and symbolic areas like foreign aid). A majority engage in what can only be called “magical thinking.” On one recent survey, 69 percent of Americans said that cutting “waste and fraud” would provide a full solution to the budget deficit while only 22 percent agreed that “painful choices need to be made.”
The same pattern is evident with choices between creating jobs and deficit reduction
When the question switches from a choice between reducing Social Security and Medicare benefits or spending in general on the one hand and reducing the deficit on the other to the parallel and closely related economic choice between creating jobs through government spending versus reducing the deficit, polls again provide support for both conservative and progressive views. In one poll, for example, only 38 percent of Americans supported increasing spending to create jobs while 54 percent preferred cutting spending and in another, 49 percent preferred to “cut government spending to match revenues” in contrast to only 36 percent who favored the alternative of “growing the economy to raise revenue.” Other polls, however, show opposite results. One survey, for example, found that 62 percent favored creating jobs in contrast to only 35 percent who favored reducing the deficit. And in “easier” questions that only ask about support for desirable goals, 72 percent support “federal laws that would spend government money for programs to create a million jobs” or “put people to work on urgent infrastructure repairs.”
But as with the choice between preserving major entitlement benefits and deficit reduction, the most common public reaction to questions posing a direct trade-off between job creation and deficit reduction is a firm refusal to choose between these two objectives and a contrary insistence that both must be sought and achieved at the same time. When given the ability to choose between “job creation” and “deficit reduction” on lists of the “most important” issues or when indicating if their attitudes are basically favorable or unfavorable to these objectives on “issue thermometer” style polling questions, most Americans do not firmly support one goal and assign a low priority to the other but rather indicate that they very strongly insist on achieving both objectives simultaneously.
It is, of course, obvious that differences in question wording necessarily play a profoundly important role in producing this wide range of responses, but that alone does not provide a sufficient explanation. It is, in fact, impossible to examine the entire range of question wordings and still detect any genuinely coherent progressive or conservative viewpoint that unites all of them. The full range of data suggests that public attitudes are indeed deeply confused and incoherent.
There is, however, one key pattern in the data that helps to explain the apparent incoherence of the results: a very substantial sector of the American public does not understand or accept the basic Keynesian vision of how an economy operates.
The Inconvenient Truth: Americans don’t believe the traditional textbook perspective of Econ 101
When Americans are asked questions that test public understanding of basic Keynesian concepts such as “Do you think that cutting federal spending would create jobs or eliminate jobs”, opinions often split nearly evenly (in one survey by 41 vs. 45 percent) between the two choices. Moreover, when a third choice is added that cutting spending “will not have much effect either way,” a strong plurality of 41 percent chooses that option while another 18 percent think cuts will actually increase job creation. In this survey, only 34 percent agreed with the basic Keynesian notion that spending cuts will indeed reduce job creation.
This conclusion is reinforced by another recent poll which showed just how pervasive this lack of understanding really is. In answer to a question that asked a nearly perfect Econ 101 final exam query: “To help the economy recover from a recession, should the federal government usually increase spending, decrease spending or keep it about the same” a remarkable 55 percent of the respondents said government should actually decrease spending to help the economy recover from a recession while only 18 percent advocated an increase. When asked what would seem a remarkably leading question: if the federal government increased spending on infrastructure projects, would it result in more or fewer jobs, the respondents astonishingly split 49-51.
In short, a very substantial proportion of Americans simply do not see the economy in the Keynesian way that progressives quite naturally and reasonably assume that they do. Many of the basic economic relationships and processes that progressives take for granted in their thinking are simply not shared by many ordinary Americans.