China and its Discontents

This is a joke:

“The last time Republicans gained control of the House, in 1994, they achieved more in the first 100 days than some Congresses have in two years. From welfare reform to tax cuts to a balanced budget amendment, they passed every one of their 10 ‘Contract With America’ items. … Once again, Republicans cannot be timid. American voters overwhelmingly support spending cuts to balance the budget; six in 10 of them support a 21 percent across-the-board cut in nonmilitary discretionary spending.”

Reality check: the 111th Congress, as in this Congress (yes, the one where Democrats have been in power), has been one of the most productive in history, on par with congress during the early years of both LBJ and FDR. Luntz cites: “welfare reform to tax cuts to a balanced budget amendment” as examples of Republican productivity 15 years ago. The problem is: everyone loves a tax cut. Everyone loves to cut welfare for Cadillac mommies. And the balanced budget amendment never passed the Senate. And then they shut down government over the deficit. So much for that: we got rid of the deficit by the end of the decade anyway, mostly because of a booming economy.

There are no natural constituencies against for what the Republicans are for. The poor on welfare don’t have a voice in government, but business does. While there might exist policy analysts who think certain tax cuts are bad for our budgets, there’s no constituency who is going to refuse one. Many Democratic priorities, however, require a gentler finesse in order to get passed. In other words, there are vested interests who will lose money if Congress acts for the greater good. It requires some politicking to persuade these vested interests, and that’s hard.

Here are some things the 111th Congress has accomplished: stimulus, which in itself represents a dramatic investment in infrastructure, schools, and a tax cut all rolled into one; healthcare reform, which could be split up into numerous major bills, such as closing the Medicare doughnut hole, providing coverage to 40 million Americans, requiring pre-existing conditions to be covered, allowing kids to stay on their parents’ plans until age 26, making sure all children have health insurance, and reducing the rise in the growth of healthcare spending; financial regulatory reform, which both forms a consumer protection agency to ward against faulty financial products that will explode in consumers’ faces, and derivatives that will likewise explode in bankers’ faces; Ted Kennedy’s final legacy, the SERVE America Act, which dramatically expands the number of young people serving in AmeriCorps and creates a ‘Social Innovation Fund’, which funds evidence-based programs with private and foundational support in pursuit of solving major social challenges; tobacco-regulation legislation; credit-card legislation, which establishes a credit-card bill of rights and bans arbitrary interest rate increases; fully funding and expanding the Veterans Administration; the Lilly Ledbetter Fair Pay Act (for all the ladies out there); fully funding the Violence Against Women Act (again, for the ladies); student loan reform and increased access to Pell Grants; Promise Neighborhood legislation (one of my favorite, and under-exposed in the entire bunch); cracking down on mortgage fraud; and more jobs legislation than I can count, including the Advanced Manufacturing Fund for innovative manufacturing strategies, expanded loan programs in the Small Business Administration, Energy Partnership for the Americas, creating markets overseas for our clean-energy industries, fully funding the Community Development Block Grant, job-training programs for clean energy technologies, and of course, everything already in the Stimulus Act.

Whew. That was a lot. And it makes Frank Luntz argument look ridiculous. Luntz says the Democrats loss is not about “deficient personalities or insufficient communication,” but about wrong priorities. I’m sorry, but Democrats promised this exact agenda when they were elected, and they delivered.

Luntz’s policy suggestions are likewise inane:

(1) Balance the budget as quickly as possible through meaningful spending reductions, a hard spending cap and a constitutional amendment so that it never gets unbalanced again.

(2) Eliminate all earmarks until the budget is balanced, then require a two-thirds vote by Congress for future earmark legislation.

(3) Keep taxes down by requiring supermajorities for increases, and eventually enact tax reform with a simple, low, fair rate that drastically reduces the length of the IRS code.

(4) Create a blue-ribbon task force that engages in a complete, line-by-line forensic audit of federal agencies and programs to end waste and reduce red tape and bureaucracy.

(5) And require Congress to provide specific constitutional authorization for every bill it passes so that the government stays within the boundaries imagined by the founders.

1) Spending reductions won’t get the job done without reductions in the rate of spending growth, especially in the medical sector, while a spending cap is unwieldy and not specific enough; 2) earmarks comprise a pitifully small portion of the annual deficit; 3) supermajority-requirements for tax increases have ruined California’s budget outlook and are a bad idea, while a “simple, low, fair rate” (i.e. the flat tax) is regressive and rewards the rich while punishing the poor; 4) a line-by-line audit of the budget is already being done – there’s already a non-military discretionary spending freeze; 5) who decides what’s acceptable in the eyes of the Constitution? Some wackos think the Constitution was written by Moses. I think this is the job of the Supreme Court, a job it has successfully carried out since Marbury v. Madison.

Ultimately, collective political behavior can seem irrational. Democrats ran on a specific platform, got elected in historic numbers, passed most of their platform, and then got dumped in historic numbers. But really, it’s just the floundering economy, and the Federal Government’s inability to fix a massive sink-hole in demand (now if this were the Reagan recession, which was actually created by the Fed and interest rates were raised to break stratospheric inflation in the late 70’s, it would be a lot easier to fix – just lower interest rates). What do I take from all of this? The Democrats’ loss has to do with anything but their policy accomplishments, and the political winds during a massive recession can switch on a dime.

One of Ezra Klein’s blog posts today reminded me to write a little note clarifying an earlier post – “Rebuilding America”. That post was more of a broad overview on the inability of the federal government to enact any further fiscal or monetary stimulus. I argued that President Obama needs to make an unequivocal case for ‘rebuilding America’ with the type of “Grand American projects” associated with the strategic visions proposed by Steve Clemons and James Fallows.

What I was unclear about was what the term “Grand American projects” meant. My working definition now is long-term fiscal policy designed to quantitatively improve the working class’ quality of life and productivity, and to reduce the income gap. In short order, to revitalize the social mobility that was characterized by the 90’s. This is a broad definition – it includes investments in renewable energy, transportation networks, urban renewal and planning, other infrastructure, and education (this list is by no means exhaustive). These policies need to be passed now and take effect over the next several decades, rather than serve as a reactionary measure a la the 2009 stimulus.

What about what has already been signed into law? I view financial reform as a necessity, but not a Grand American project; it’s mainly a reactive measure. Part of health-care reform would qualify – R & D, IT investment. The rest of the bill is absolutely vital in improving quality of life and productivity, but is not intended to radically improve social mobility. Finally, tax-code reform (this calculator from CEPR is useful – I would add more income levels in the tax code and tax the top marginal rate higher) is necessary to fund these investments and reduce our debt obligations.

The US has been wracked for the past decade with what Ed Luce calls “the Great Stagnation”. Real income has decreased, and we’ve let our regulatory system grow dysfunctional from disuse and our infrastructure system decrepit from under-investment. We’re also competing with foreign industries to accomplish the same goals. I don’t believe foreign growth is bad – on the contrary, Chinese growth opens up Chinese markets to our goods and services. But I do think that US stagnation is bad. We vitally need a positive vision of a more equitable America. I don’t use the word ‘vision’ lightly. It can’t be anything less than a ‘vision’. Anything less would be disastrous.

David Brooks’ latest op-edclaims that Keynesian counter-cyclical stimulus proponents have it all wrong – fiscal policy resulting in government debt doesn’t boost aggregate demand, it frightens the business community with visions of debt armageddon: