Expenditures, as a percent of GDP, has been 23-24%, while taxes have been about 14%. The math is not partisan. If there’s a genuine interest in closing that gap by the party of fiscal irresponsibility, the same party that created the structural deficits, then raising revenue has to be part of it. I honestly don’t believe the GOP has any real interest in doing anything about the deficit. They insisted since Reagan that deficits don’t matter. Their real interest is in getting rid of what they view as an illegitimate President, while reducing programs they’ve always hated. If it takes tanking the economy, so be it.

Faced with the very real possibility of default less than seven days away, the current favorite GOP talking point presents President Obama as a politically calculating fear-monger, trying to scare old people and markets with tales of what will happen if we don’t raise the debt ceiling. The markets are less sentimental. Math doesn’t have a partisan spin and you can’t convince creditors that refusing to pay your bills is a brave stand for fiscal responsibility.

via Debt Ceiling Crisis: Boehner’s Hypocritical Response – The Daily Beast.

Plenty of conservatives are peeking at this morning’s grim GDP numbers, as well as the downward revisions to previous years, and concluding that the stimulus clearly must have failed. “But remember,” snarks James Pethokoukis, “no matter how bad the economy is, Obama stimulus still created 3 million jobs, right?”

That’s one way to look at it. Another is to dig a little deeper into the new GDP numbers, which tell a different story. As Moody’s chief economist Mark Zandi told me this morning, the revisions suggest that the recession following the financial crisis was much, much more severe than we’d thought—the economy actually shrank at a 7.8 percent annual rate in the fourth quarter of 2008 and first quarter of 2009, not 5.9 percent as originally believed.

Then, Congress passed the stimulus bill, the fall in growth dwindled to 0.7 percent in the second quarter, and, by the third quarter of 2009, we had 1.7 percent growth. “We went from negative to positive at precisely the time that the stimulus was providing maximum benefit in terms of tax cuts and spending increases,” Zandi says. “The numbers actually reinforce the importance of the stimulus in jump-starting a recovery.” What the stimulus didn’t do, however, was raise employment to the levels that the White House had predicted — partly because the economy was in worse shape than anyone, even the official data-crunchers, knew.

Of course, the stimulus only lasted two years, winding down in the end of 2010. And what happened then? As Dean Baker, an economist at the Center on Economic and Policy Research observes, “The downward revision to the first quarter data coupled with the revision of the fourth quarter growth to 2.3 percent from 3.1 percent, suggests that the winding down of the stimulus has seriously dampened growth.”

via What the new GDP numbers tell us about stimulus – Ezra Klein – The Washington Post.

As many noted at the time, the stimulus was too small to do the job. It was too small because Republicans insisted it be that way and weighed it down with 40% tax cuts.

In any case you can’t throw around that much money without creating some stimulus it’s just that this is not an efficient way of doing it. Direct benefits to the needy created by the downturn and investing in way past due infrastructure spending would be much more effective in creating jobs while investing in our future. Other useful ideas would involve forcing federally backed mortgages to adjust to current interest rates to keep federal backing and much greater public support for post secondary education, perhaps with a student loan repayment program to relieve burdens on middle class families.

Krugman sees some positives but much greater negatives. Particularly in the fact that the unemployment extension only lasts 13 months, while the tax cuts last 2 years. This has implications for the next election, in that the trajectory of the economy is the single largest factor in determining if an incumbent President gets reelected.

I hear rumblings about a comprehensive tax reform effort proposed by the White House. The goal would be to lower rates but not revenue by removing various tax deductions and loopholes. An overly complex, inefficient tax code favors those with the wherewithal to hire accounts and tax lawyers to find ways to weasel out of paying. It leaves the effective rates much higher for low and middle income households relative to the wealthy.

We have a clear need to restore some progressivity to the tax system. We’ve seen the wealthy take a greater and greater share of income over the last 30 years, while the rest suffer from stagnant real wages despite large gains in productivity. This creates a situation where middle class consumption can no longer support the economy, which I believe is one of the structural reasons for the lingering economic downturn. Robert Reich has more here. We cant change this without reforming the tax code. We’ve tried the GOP approach and I think the results are in. We need a new approach to the tax system.

The key thing to bear in mind is that for the world as a whole, spending equals income. If one group of people — those with excessive debts — is forced to cut spending to pay down its debts, one of two things must happen: either someone else must spend more, or world income will fall.

Yet those parts of the private sector not burdened by high levels of debt see little reason to increase spending. Corporations are flush with cash — but why expand when so much of the capacity they already have is sitting idle? Consumers who didn’t overborrow can get loans at low rates — but that incentive to spend is more than outweighed by worries about a weak job market. Nobody in the private sector is willing to fill the hole created by the debt overhang.

So what should we be doing? First, governments should be spending while the private sector won’t, so that debtors can pay down their debts without perpetuating a global slump. Second, governments should be promoting widespread debt relief: reducing obligations to levels the debtors can handle is the fastest way to eliminate that debt overhang.

But the moralizers will have none of it. They denounce deficit spending, declaring that you can’t solve debt problems with more debt. They denounce debt relief, calling it a reward for the undeserving.

And if you point out that their arguments don’t add up, they fly into a rage. Try to explain that when debtors spend less, the economy will be depressed unless somebody else spends more, and they call you a socialist. Try to explain why mortgage relief is better for America than foreclosing on homes that must be sold at a huge loss, and they start ranting like Mr. Santelli. No question about it: the moralizers are filled with a passionate intensity.

via Mugged by the Debt Moralizers – NYTimes.com.

If I hear another person say something as stupid like “if I have to live within a budget so should the federal government”, I swear the idiot gets it.

It’s not for lack of trying, but no one can find evidence that Bush’s economic polices helped the economy.  The center piece of the policies were the tax cuts.  Trillions of dollars in GOP wet dream supply side economics was an abject failure. On the other side I really believe that it was prime cause of increasing wealth inequality in the US.

Marginal Revolution: The Obama tax plan, or Austro-Obama business cycle theory.

Companies combining deductions proposed by Obama for equipment with deductions for borrowing costs would get benefits — including refunds or credits against future taxes – - that exceed the additional income they get from new capital spending, according to a 2005 report by the Congressional Budget Office. For every $1 of additional income from new capital spending, companies may be able to get benefits worth almost $1.88, according to the budget office report.

Equally brilliant!

Is it really that hard for the federal government to spend money on stuff we actually need to support demand in a sputtering economy? Alternative energy? End incentives for shipping jobs overseas? Naw, let’s just put a kick me sign on federal tax policy. USA! USA? USA??

1. Restore spending to 2008 levels

2. Extend Bush era tax cut forevah!

As noted:

So on the one hand, a measure that will make a small dent in the deficit. On the other hand, a measure that will lead to a huge increase in the deficit. There’s no theory of the economy in which this really makes sense: If the market is worried about the government’s finances, this makes them worse, not better. …

Simply brilliant!

GOP Offers Heckling As Economic Solution – StreetTalk – happenings on wall street – Forbes.

The GOP’s constant kneejerk rejection of economic ideas simply for the sake of Saying No has as much to do with our current malaise as anything being done wrong in the White House.  The newly-minted fiscal conservatives on the Republican side of the aisle, many of whom are themselves responsible for the $3 trillion and counting Iraq War, are like the old men in the Muppet Show who heckle from the balcony.

It’s naysaying for naysaying’s sake at this point and I hope voters will remember that their favorite Republican All-Stars are equally complicit in the crime that is 15 million unemployed 3 years into a recession.

Gotta love the graphic. But to address the substance of it, the GOP would have nothing to gain by the economy, and by extension the President, succeeding. If both fail they win more seats, and that’s really all they care about. They want to win so they can continue to do the bidding of their political patrons. The ills of the economy and the suffering it causes are entirely secondary to their political ambitions.

Bill Gross, who runs Pacific Investment Management Co.’s $239 billion Total Return Fund, said that policymakers “should quickly re-engineer” a plan that would refinance all non-delinquent mortgages backed by the federal government. The rate on a 30-year fixed-rate mortgage averaged a record-low 4.44 percent in the week ending Aug. 12, according to taxpayer-owned mortgage giant Freddie Mac.

Taxpayers guarantee the mortgages of 37 million households, or two-thirds of all homeowners with a mortgage, according to a July 29 note by David Greenlaw, Morgan Stanley’s chief U.S. fixed-income economist. That includes government agencies like the Federal Housing Administration as well as twin behemoths Fannie Mae and Freddie Mac. Greenlaw estimates about 18.5 million taxpayer-backed mortgages are at rates higher than 5.75 percent interest.

By refinancing those mortgages at current, lower rates, Greenlaw believes those homeowners would save $46 billion a year. Gross said the refi scheme would spur some $50-60 billion a year in new consumer spending and raise home prices between 5-10 percent. Forecasters, including Fannie Mae, say home prices are set to decline the rest of the year and into 2011. Former Federal Reserve Chairman Alan Greenspan said this month that a so-called double-dip recession is possible “if home prices go down.”

via Famed Investor Bill Gross Calls For Massive Taxpayer-Backed Mortgage Refinance Initiative.

Ezra “don’t call me JD from Scrubs” Klein has more:

The politics of this plan are interesting: The difficulty with most housing interventions is that they help the family that took on too much housing debt, and that makes their neighbors — who didn’t take on too much housing debt — angry. This plan, by contrast, helps the people who aren’t behind on their mortgages. It helps the people who’ve been doing everything right, but are nevertheless stuck in a crummy economy.

I haven’t been able to find a re-fi deal for our house. Since the bottom dropped out of real estate here in the Tampa Bay area, my loan to value ratio isn’t good enough to get anything less than the 5.75% I have now. I’m not behind on mine so none of the other plans had any impact on our household. This would definitely inject some liquidity into my personal economy.

When the Financial Times thinks that income distribution and middle class wage stagnation are a problem, I’d say that means it’s a long standing crisis:

The slow economic strangulation of the Freemans and millions of other middle-class Americans started long before the Great Recession, which merely exacerbated the “personal recession” that ordinary Americans had been suffering for years. Dubbed “median wage stagnation” by economists, the annual incomes of the bottom 90 per cent of US families have been essentially flat since 1973 – having risen by only 10 per cent in real terms over the past 37 years. That means most Americans have been treading water for more than a generation. Over the same period the incomes of the top 1 per cent have tripled. In 1973, chief executives were on average paid 26 times the median income. Now the ­multiple is above 300.

The trend has only been getting stronger. Most economists see the Great Stagnation as a structural problem – meaning it is immune to the business cycle. In the last expansion, which started in January 2002 and ended in December 2007, the median US household income dropped by $2,000 – the first ever instance where most Americans were worse off at the end of a cycle than at the start. Worse is that the long era of stagnating incomes has been accompanied by something profoundly un-American: declining income mobility.

Alexis de Tocqueville, the great French chronicler of early America, was once misquoted as having said: “America is the best country in the world to be poor.” That is no longer the case. Nowadays in America, you have a smaller chance of swapping your lower income bracket for a higher one than in almost any other developed economy – even Britain on some measures. To invert the classic Horatio Alger stories, in today’s America if you are born in rags, you are likelier to stay in rags than in almost any corner of old Europe.

Combine those two deep-seated trends with a third – steeply rising inequality – and you get the slow-burning ­crisis of American capitalism. It is one thing to suffer ­grinding income stagnation. It is another to realise that you have a ­diminishing likelihood of escaping it – particularly when the fortunate few living across the proverbial tracks seem more pampered each time you catch a glimpse. “Who killed the ­American Dream?” say the banners at leftwing protest marches. “Take America back,” shout the rightwing Tea Party demonstrators.

I wonder what a m0dern day Alexis de Tocqueville would say about it now? The GOP would like to lay all of this on the doorstep of the Obama administration. Voters may well go along with the usual suspects from the noise machine on the right. After all, he’s (kinda) black and sounds foreign, that’s enough for some.

Krugman notes that what are effectively austerity policies will cause the current economic malaise to remain, dragging the economy down. Failure to support local and state governments who lack the means to maintain spending levels will in essence reverse the recovery as they are forced to lay off workers and cancel projects. Congress, or at least it’s GOP members and Blue Dog Democrats believe that deficit spending is greater threat than years of high unemployment.

It’s has if the lessons of the Great Depression were never learned at all. Maybe it’s time to curtail nation building in Iraq and Pakistan and spend that money here. At least we’d have something to show for it. After all the time and money spent in these unending wars and what have we to show for it? On the way into work this morning, I was listening to an NPR interview of an Afghan government official responsible for training the National Police Force. He said it would take another 7 to 8 years before they’d be capable of operating independently. WTF!?!?

Enough blood and treasure has been wasted trying to bring stability to region hasn’t know stability in living memory.

This is really depressing. The stimulus package passed early in the Obama administration helped a bit, but not enough. It was scaled back in size and watered down by turning 40% of it to tax cuts, the least effective means of stimulus. This was done in an effort to win support from Republicans who voted against it in lock step, and to please so-called deficit hawks like Blanche Lincoln. Have a look at the graphs in the Calculated Risk blog post linked above. If it weren’t for census hiring unemployment wold be flat. State counties and municipalities continue to scale back and fire workers.

What we need is another round of stimulus. Yes, that will increase the deficit in the short term. But other than the federal government there is no one else who can intervene. The alternative is a lost decade much like Japan in 90′s:

Lost Decade Here We Come

But don’t we need to worry about government debt? Yes — but slashing spending while the economy is still deeply depressed is both an extremely costly and quite ineffective way to reduce future debt. Costly, because it depresses the economy further; ineffective, because by depressing the economy, fiscal contraction now reduces tax receipts. A rough estimate right now is that cutting spending by 1 percent of GDP raises the unemployment rate by .75 percent compared with what it would otherwise be, yet reduces future debt by less than 0.5 percent of GDP.

The right thing, overwhelmingly, is to do things that will reduce spending and/or raise revenue after the economy has recovered — specifically, wait until after the economy is strong enough that monetary policy can offset the contractionary effects of fiscal austerity. But no: the deficit hawks want their cuts while unemployment rates are still at near-record highs and monetary policy is still hard up against the zero bound.

Austerity measures in the midst of our economic situation is, as Krugman closes with, “utter folly”.

Ezra Klein – The jobless recovery, explained.

Annie Lowrey brings the data:

Wondering what’s behind those recent jobless recovery numbers?

1. Fortune 500 companies tripled their profits to $391 billion in 2009.

2. They also slashed their payrolls by more than 800,000 jobs.

There’s been a lot of talk about productivity growth lately, and I think this does a good job explaining what’s going on: Corporations are getting more from fewer workers.

Tim Geithner did manage to hold the financial system together for the most part through the worst financial crisis in modern times. Yet he seems reviled on both the left and the right. The media ignores the successes and plays up the failure, as the media so loves to do. I guess it sells more advertising.

Could he have done better? In retrospect nearly everything done by humans can be done better. Hindsight is 20/20 they say.  Populist anger is driven by the crisis causing the curtain to sag a bit, revealing ugly truths about the interrelationships between big money and the government. Americans like their illusions.

Brother can you spare a dime? – Tom Waits version. No one can give voice to the pain of a working man without a job like Tom.

I guess the song is making a come back…

It seems to me that the American political system is simply broken. Canada could reduce the size of government and keep health care spending in check because in a parliamentary system with strong party loyalty, individual politicans are given “cover” by their parties and are not held personally responsible for the taxes and benefits of their constituents. If the party in power makes a decision to cut benefits which will harm an individual politician’s district, that politician isn’t necessarily on the hook for it. The voters know that he has to vote the party line even if he disagrees with the legislation. He gets re-elected so long as the public feels his party in general is better than the opposition.

In the U.S. system, where every vote is a free vote, each member of Congress has to answer for his/her votes, and this drives NIMBY-ism and ever-increasing benefits without the tax hikes to pay for them, and it also causes wheeling and dealing which ultimately makes large regulatory packages like health care reform incoherent and bloated with pork.

I think American government works well when it's strictly limited. When Americans try to implement Euro-style social democracy, they fail due to the nature of American government. It is uniquely unsuited to centralized technocratic governance.

via Marginal Revolution: Is there a case for a VAT?.

That would imply that we either:

• Abandon the welfare state and social justice goals altogether (the preferred answer for glibertarians, Club for Growth types, Tea Partiers  and increasingly the GOP).
• Adopt significant changes, primarily in the Senate, that allows it to function without the bribery/kleptocratic bullshit we’ve seen recently.

There is of course the non-choice of muddling on with increasingly incoherent voters, driving an increasingly incoherent government (i.e., simultaneously clamoring for more benefits, lower taxes and deficit reduction). The end game there is a larger uglier version of California’s problems. This is where foreign investor lose their appetite for American debt, forcing higher interest rates that then consumes a higher share of GDP to service our debt without any real benefit to the national welfare.

My preferred choice is we need to abandon the “beloved traditions” of the Senate and hew more closely to what the Constitution says about the Senate. I’ve yet to find the anything in the Constitution or it’s amendments that says you need 60 votes to pass anything of significance. The rules have been abused in ways that prevents the federal government from addressing major issues. We deserve better,

The Wapo notes that the Japanese have overtaken the Chinese as the number one purchasers of American government debt.

Apparently we’ve gotten to 88 mph in the Delorean and the flux capacitor has taken us back to 1985…

Fear the Japanese Overlords!

h/t Ezra Klein

The real danger is that the lack of investors forces the Fed to raise interest rates to attract foreign investors which causes the portion of GDP paid to interest to crowd out other spending. Then the excrement will indeed hit the fan.

h/t to Ezra Klein who points out that no one who voted for the programs that drive the deficit (Bush Era tax cuts, Medicare Part D, two unfunded wars, financial bail out and the regulatory environment that made the former necessary) can call themselves a deficit hawk now. It’s just smoke for the marks…