New Issue! Plus: Regional economic disparities and Hillary Clinton’s Unfortunate Remarks

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Our March/April issue is at the printers (and in e-subscribers’ inboxes). (Not a subscriber yet? You can subscribe now here!)

We just posted an article from the new issue–Jerry Friedman’s “Economy in Numbers” column, Growing Together, Flying Apart: Regional Disparities in American Politics and Economics.  Coincidentally, it provides excellent commentary on the remarks Hillary Clinton made recently, to great controversy, characterizing the parts of the country she won in the 2016 presidential election compared to those won by Trump:

“If you look at the map of the United States, there’s all that red in the middle where Trump won,” Clinton said. “I win the coast, I win, you know, Illinois and Minnesota, places like that.”

“I won the places that represent two-thirds of America’s gross domestic product,” she continued. “So I won the places that are optimistic, diverse, dynamic, moving forward. And his whole campaign, ‘Make America Great Again,’ was looking backwards.”

Jerry’s article talks about the regional economic disparities that have left Trump-voting regions (and rural parts of Clinton-voting regions) behind, and the political consequences of those disparities.

Here is the editorial note for the issue:

This Is Your Economy on Finance

The Dow Jones Industrial Average reached an all-time high of 26,616 points on January 26 of this year. That was after rising almost 8,000 points since Donald Trump’s inauguration. The Dow then fell over 2,700 points in early February, which met the technical definition of a market correction—a drop of at least 10% from a recent high. Since then, the Dow and other indices have gone up and down, but mostly up, since the correction.

What does this mean for the rest of us, and what does it tell us about the economy? Much of the business press would like us to think the rising stock market is good news for the economy; that was President Trump’s message in his first State of the Union a couple of weeks before the correction. But the business press tipped its hand when it explained the correction as markets’ reaction to lower unemployment and a minor uptick in wages. Why would investors consider wage increases bad news? According to John Miller, it’s all about class conflict—and about the disconnect between stock market investors (and stock values) and workers on “Main Street.” Even slightly higher wages lead investors to fear higher labor costs and inflation. But workers’ share of output remains low, and corporate profits continue to be at record highs—numbers which “reveal the unwillingness of the financial powers to share with workers the gains of economic growth.”

In the second part of her three-part series on deindustrialization in Keene, N.H., Marie Duggan gets into more detail about the adverse effects of a financialized economy, and its tendency toward financial bubbles, on workers. The story of how a local company, Miniature Precision Bearings, was acquired by a much larger company, Timken, shows how asset bubbles and financialization have contributed to deindustrialization and job loss. When management spends its accumuated capital manipuating stock price, the math means there will be less capital available for investment in the equipmient and people to produce quality product. The financial bubble of the 1990s seemed so great at the time with the rising value of pensions, but it turns out that the market wasn’t raising funds for industry, but rather was persuading industry to abandon product quality and investment in the company, workers, and community. The backstory of the decline of rural America may be the giant sucking sound of the stock market removing funds from the industrial base into stock price manipulation, given the 1990s bubble. This is all the more ominious, given that the rise of the stock market under Trump gives every appearance of being a bubble itself.

Gerald Friedman’s Economy in Numbers column in this issue tells a related story of regional economic disparities and their political consequences. As Friedman points out, federal policies favoring Wall Street have been better for urban areas on the coasts, but have contributed to deindustrialization and lagging income growth in other regions (and, as we see from Duggan’s article, non-urban parts of coastal regions are also falling behind). Both political parties’ embrace of neoliberalism has eroded the safety net and has neglected industrial policy.

This issue’s cover story suggests an alternative understanding of finance and monetary policy that could point to a way out of neoliberal economic policies that have led to these regional disparities and to widening inequality. Modern monetary theory (MMT) addresses the connection between lending (and debt) and money, and undermines the standard views of taxes and deficits that justify austerity policies. MMT points to a way to stimulate the economy by providing the finance and credit people need to buy products, and that businesses need to be able to sell their products, and in that way moving economic policies beyond austerity and deficit fear-mongering. The MMT approach could finance government policies—including infrastructure spending, direct job-creation, national health care, and industrial policy—that would lead to full employment and greater equality.

Also in this issue: Arthur McEwan tallies up the economic costs of Puerto Rico’s ongoing crisis, Noah Berlasky lays bare the neoliberal foundations of the self-help literature, and more!

Jobs, Jobs, Jobs — Not Austerity

By William K. Black

Cross-posted at New Economic Perspectives.

Bob Rubin and Alan Greenspan convinced the New Democrats, over a quarter-century ago, that the key to economic growth was to out-Republican the Republican Party in the fervency of their embrace of austerity.  This began the long war of the New Democrats against the working class that culminated in the loss of their candidate, Hillary Clinton, to Donald Trump.  Rubin’s and Greenspan’s support for austerity constitutes economic and political malpractice.  Austerity is the enemy of the general economy and the people of the world, but it targets for its greatest harm the working class.  As I have explained in earlier columns, Hillary was so devoted to austerity that she made it her major new policy theme in the closing weeks of her campaign – even as every poll warned her that she had enraged the white working class, a principal victim of austerity.

The stranglehold that Rubin and Greenspan’s anti-worker dogmas continue to exert over the Democratic Party’s faux centrists’ policies even after Trump’s election is illustrated by a December 5, 2016 New York Times editorialentitled “How to Help Working People” and Larry Summers’ December 4, 2016 op ed entitled “Trump’s tax plans favour the rich and will hamper economic growth: The proposals would threaten to increase federal debt and interest rates.”  Summers is Rubin’s protégé.

Any plan by Democrats to “Help Working People” should begin with the word “jobs.”  But the creation of “jobs” funded by the federal government in its critical role of employer of last resort is not even an option when policy is in the grips of austerity fever.  New Democrats take the bizarre policy position that it is too expensive to pay people who want to work to do useful work, but fine to pay them extended unemployment insurance because there are not enough private sector jobs to employ them full-time.

The NYT editorial is so mixed up that it never mentions either the primary problem – the devotion to self-destructive austerity of New Democrats and Old Republicans – and never mentions the essential policy that would transform our economy and win the devotion of the working class to whatever party puts the policy in place.  That policy is a dedication to permanent full employment by making the federal government the employer of last resort for any American who wants to and is able to work.  Instead, the editorial focuses on a number of desirable policies to help workers who are already fully employed.  Yes, most Americans who wish to work are employed and we should implement policies that help fully employed working class Americans.  But tens of millions of Americans are classified as “underutilized” by the Bureau of Labor Statistics.  Many were so discouraged by the job markets that they dropped out of the work force.  Worse, Americans in general and the working class in particular no longer believe that they have any meaningful job security – that our jobs could disappear without warning within months.  The federal employer of last resort would transform the workplace by restoring job security.

The editorial’s sole emphasis is on increasing the income of fully employed workers.  That is a worthy goal that should be pursued in parallel with the paramount goal – jobs and providing the security to all Americans of always being able to find a job if they are willing and able to work.  More income for the already fully-employed working class is great, but Americans want to work and working class males are the most vulnerable psychologically to being unable to hold a full-time job or the constant fear introduced by the destruction of job security.  When working class males are unable to hold down a steady job the results are horrible for family formation and family success.

Austerity’s Choice

Millions of Democrats are salivating at the prospects of being able (again) to chortle at the hypocrisy of Republicans when it comes to austerity.  Yes, Republicans always say they love austerity, but when they are in power in modern times they always rise above their pro-austerity dogma and adopt at least some stimulus.  Democrats are eager to attack the hypocrisy and Congressional Democrats are gleefully planning to trap Trump in a welter of demands for “revenue neutral” taxes (code for austerity) and “pay fors” (another code for austerity).  The New Democrats are so eager to attack Trump’s “mountains of debt” that they are about to launch a new offensive against the working class in the New Democrats’ long war against the working class via economically and politically illiterate austerity.

And how will the Republicans respond?  Enough will bend to Trump that they will likely do a major infrastructure program.  Then the Republicans will confront the New Democrats with their own odes to austerity and “pay fors” and demand that the New Democrats make an analog to Sophie’s choice.  Austerity demands budget cuts in other fields, so the Republicans will tell the New Democrats to choose which social program they are most desperate to preserve – and consign the other programs to death via austerity.  In sum, the New Democrats are about to replay the same disastrous economic and political mistakes that have caused so much harm to Americans, particularly the working class, and gifted the presidency to Trump.

Please read Randy Wray’s primer or his newest book.  A government with a sovereign currency such as the United States is not “just like” a household or a corporation or the State of Vermont.  A budget surplus or deficit for the U.S. federal government is not a moral issue.  A budget “surplus” or “deficit” is not an intrinsically good or a bad thing – it depends on the economic conditions of the real economy.  For the U.S., with its unique role as the international currency and large trade deficits, federal budget deficits are typically desirable – and typically occur under both Democrats and Republicans.  We do not “burden” our “grandchildren” when we run federal budget deficit in typical circumstances or in response to a Great Recession.  We greatly aid our children and grandchildren by rejecting austerity in such circumstances.  We would help them far more if we provided a federal job guarantee of last resort.

Summers’ Shout Out for Austerity

Summers’ subtitle warns that Trump’s tax proposals “would threaten to increase federal debt and interest rates.”  In other words, Summers is banging the war drums to renew the New Democrats’ long austerity war against the working class.  There are two parts to Summers argument.  First, Trump’s proposed tax cuts are crafted to help the wealthiest Americans.  Second, the tax cuts would increase the budget deficit.  Summers’ first argument is mostly fine, indeed, it is understated.  (He makes the false claim that President Reagan’s tax cuts did not favor the wealthy and represented a “bipartisan” “reform.”)  Trump’s plan is to betray the 99% and rig the system to lock in the power and wealth of the one percent (indeed, the top .0001).  Trump remains, as he has been for decades, a crony capitalist.

Summers’ second argument is “Austerity Forever.”  He leads with another code phrase for austerity, implying that the proper standard for any tax changes is that they be “revenue-neutral reforms.”  That means no net tax cuts.  Why?  What we know, as even Summers agreed, was that President Obama (who told New Democrats that he was a New Democrat) proposed a stimulus program that he knew (because Summers told him) was far too small and then turned his back on stimulus and then in early 2010 in the State of the Union abandoned stimulus and proposed austerity (the code, provided by the Rubinite Jack Lew, was that the federal government should “pull in its belt” in response to the Great Recession because households were doing so).

The 2009 stimulus, though deeply inadequate, materially increased U.S. growth.  The self-destructive switch by January 2010 to supporting austerity greatly extended the recovery time from the Great Recession and weakened job market reovery.  The U.S. economy could benefit greatly from stimulus even now, so why should Democrats be insisting that they will fight any net tax cut?  Summers’ answer, as always, is the need for austerity.  He stresses that Trump’s (net) tax cuts would violate austerity.

It would also mean grave damage to federal budget projections. The envisioned Trump tax cut is about the same size relative to the economy as the 1981 Reagan tax cut. It is worth remembering that Reagan, hardly a fan of reversing course or raising taxes, found it necessary to propose significant tax increases in 1982 and 1984 (the equivalent in today’s economy of $3.5tn over a decade) due to concerns about federal debt.

So, we now have the New Democrats’ lead economist, Summers, telling us we should be in panic mode because Reagan had such a dogmatic belief in austerity that he raised taxes (though, net, Reagan actually cut taxes).  Summers is seriously proposing that the Democrats should take their policy advice on austerity from Reagan!  He claims that Democrats, in response to the revolt of the white working class, should embrace austerity and renew the New Democrats’ long war against the white working class even though he knows that is terrible economics and politics.  Reagan knew next to nothing about macroeconomics.  Let me be explicit – both the Old Republicans like Reagan and the New Democrats shared this embrace of austerity’s long war against the working class.  Reagan’s embrace of austerity was a key contributor to the stagnation of working class wages and the rise of the plutocrats.  This is how out of touch the New Democrats are with the American people – Summers’ sees Reagan as the role model that Democrats should emulate.

Summers goes so far as to claim that stimulus would slow growth.

Today’s budget situation is much more worrisome. The baseline involves much higher levels of debt and deficits. Then the economy was suffering from a deep recession; now it approaches full employment. If extreme tax cuts are legislated in the next months, uncertainty about the federal budget and about further tax adjustments is likely to rise. Finally, I can find no basis in either economic history or logic for Mr Mnuchin’s claim that the proposed reforms would increase the economy’s growth rate from its current 2 per cent rate to the historical 3 to 4 per cent norm. Adult population growth has slowed by nearly a percentage point, the gains generated by more women entering the workforce have been exhausted, and it is far from clear why tax reform will hugely spur productivity growth.

Indeed, because the Trump proposal would redistribute after-tax income towards those most likely to save it, push up long-term interest rates because of debt pressures, increase uncertainty and the advantages of overseas production, it is as likely to retard growth as to accelerate it.

Summers’ second paragraph has some important truth.  As with the second President Bush’s tax cuts, Trump’s proposed cuts go so heavily to the plutocrats that they will have less stimulus effect because so much of the cuts will be saved rather than spent.  The reduces the stimulus of the proposed tax cuts, it does not eliminate it.

The first paragraph is mostly an opportunity for Summers’ to renew his “secular stagnation” claims that suggest that the U.S., and much of the global economy, will suffer from weak growth under austerity for many decades.  If Summers is correct, then stimulus is particularly vital now.  But Summers’ primary cause is austerity, so he claims that we should accept weak growth and higher unemployment.  If Summers were correct about secular stagnation, however, the imperative policy response would be to end the New Democrats and the Old Republicans’ long war of austerity against the working class and ensure that the federal government provided a guarantee that it would serve as the employer of last resort.  Summers, of course, claims that our current condition closely approaches “full employment” and we need not worry about the millions of Americans who have dropped out of the labor force or are unemployed or underemployed.  At the insipid growth rates he believes will become the norm under austerity, the unemployment rates would grow substantially.