On Friday, I wrote that Democrats have lost the fight to replace sequestration. In agreeing to the FAA fix, they showed that in any case where the political pain caused by sequestration becomes unbearable, they will agree to cancel that particular piece of the bill while leaving the rest of the law untouched. That means their leverage is effectively nil. Game over.
Washington being what it is, Democrats losing on sequestration is taken to mean that Republicans have won on sequestration. But that’s a conceptual error wrapped in a sad commentary about modern-day politics. The sequester isn’t a zero-sum policy, where one side wins and the other side loses. It’s a negative-sum policy. Its persistence means both political parties lose. As does the rest of the country.
That, of course, was the whole point of the sequester. It was meant to be such terrible policy that neither side would permit it to go into effect. Back then, House Speaker John Boehner called the cuts “devastating,” and promised they’d never go into effect. “Devastating” was also the wordchosen by Rep. Paul Ryan.
But after losing the 2012 election, Republicans executed an impressive tactical reversal on sequestration. Aware that the fiscal cliff was a loser and the debt ceiling would be a disaster, Boehner began working to persuade his members that the sequester represented their real opportunity.
“The Republicans’ stronger card, Mr. Boehner believes, will be the automatic spending sequester trigger that trims all discretionary programs--defense and domestic,” reported the Wall Street Journal after an interview with the Speaker. “It now appears that the president made a severe political miscalculation when he came up with the sequester idea in 2011.”
This was a backflip on the high beam. And Boehner pulled it off. House Republicans went from running against the sequester to defending it as preferable to any possible compromise. Any remaining dissension dissipated under the sheer partisan glee Republicans felt watching Democrats rage impotently against the policy. Washington is a town where one party only believes it’s winning if the other party believes it’s losing. And so, as Democrats began acting like they were losing, Republicans became all the more convinced they were winning — and they dug in deeper.
But from a policy perspective, Republicans are losing right alongside Democrats.
Republicans wanted entitlement cuts. They’re not getting them. They wanted to protect defense spending. Instead, the Pentagon is getting gutted while Medicare and Social Security are left mostly untouched. They had an eye towards tax reform. Nuh-uh.
Sequestration also includes one huge, but little-noticed, downside for the deficit-conscious Republicans. As any good budget wonk knows, our debt problems are much worse in the coming decades than in this decade. But most deficit-reduction policies save much more money in the second decade than in the first. Chained-CPI, for instance, cuts Social Security benefits by a bit more than $100 billion in this decade, but by hundreds of billions in the next decade (my own note here, chained-cpi is not good for Social Security or for the nation. Find more on just how evil this proposal is by doing a search on this blog for post on chained cpi and / or Social Security). The White House’s proposals to further means-test Medicare save tens of billions in the first decade, but around $200 billion in the second decade.
As Marc Goldwein of the Committee for a Responsible Federal Budget points out, sequestration ends after 10 years. It just shuts off. So rather than putting deficit-reduction policies in place now that will grow later, sequestration puts policies in place now that will vanish later. So where a bigger budget deal would start slowly to protect the economy and then ramp up as our debt problems worsen, sequestration will start fast, hurting the economy, and then disappear as our debt problems are entering a more critical phase.
This is, for Republicans, a win only insofar as Democrats feel it a loss. But that’s a very narrow and depressing definition of what it means to “win.” Sequestration was built to punish both parties, as well as the voters who support them. If left in place, it will do its job. Republicans may feel like they’re winning. But really, we’re all losing.
Wonkbook’s Number of the Day: 1.2 percent. That’s the year-over-year change in the personal consumption expenditure price index, which the Fed uses as the basis for its 2-percent annual inflation target. Significantly below-target inflation may keep the Fed in a more accommodative mood in the coming months. More below.
Wonkblog’s Graph of the Day: Ideas have consequences, in one graph: The effects of divergent fiscal and monetary policies.
Wonkbook’s Top 5 Stories: 1) a politics, and public policy, that thinks beyond austerity; 2) racial wealth disparities widen; 3) gun control tries to reboot; 4) the unglamorous way to save money on Medicare; and 5) an overview of the White House Correspondents Dinner.
1) Top story: Austerity is dead. Long live austerity.
Democrats ask: What debt crisis? “[T]hen there are the other Democrats -- the ones who reject the entire premise of the current high-stakes fiscal fight. There's no short-term deficit problem, they say, and there isn't even an urgent debt crisis that requires immediate attention…[A]ided by a pile of recent data suggesting the deficit is already shrinking significantly and current spending cuts are slowing the economy, more Democrats such as Virginia Sen. Tim Kaine and Maryland Rep. Chris Van Hollen are coming around to the point of view that fiscal austerity, in all its forms, is more the problem than the solution.” Ben White and Tarini Parti in Politico.
…And the GOP is stepping away from entitlement reform and towards a tax overhaul. “With another fight over the national debt brewing this summer, congressional Republicans are de-emphasizing their demand for politically painful cuts to retirement programs and focusing on a more popular prize: a thorough rewrite of the U.S. tax code. Reining in spending on Social Security and Medicare remains an important policy goal for the GOP. But House leaders launched a series of meetings last week aimed at convincing rank-and-file lawmakers that tax reform is both wise policy and good politics and should be their top priority heading into talks with Democrats over the need to raise the federal debt limit.” Lori Montgomery in The Washington Post.
@tylercowen: Still way too many tweets and posts not facing up to how much the “austerity” debate, esp. in Europe, is really about distribution.
Defense cuts pose economic quandary for liberals. “Liberals are increasingly facing a conundrum as the Pentagon experiences the deepest cuts in a generation: The significant reductions in military spending that they have long sought are also taking a huge bite out of economic growth. Liberal lawmakers and others on the left have argued for years that the military budget is bloated and should be dramatically scaled back. At the same time, they have been major advocates of government spending to help drive economic growth and create jobs.” Zachary A. Goldfarb in The Washington Post.
…And at the Pentagon, the need for furloughs varies. “The Navy has said it can make the cuts needed without furloughs, while the Army thinks the war in Afghanistan and other priorities make it nearly impossible to make the cuts without furloughs. The Pentagon, focused on maintaining rough consistency in furloughs across the department, is trying to figure out how to balance the services' varied perspectives.” Steve Vogel in The Washington Post.
@ryanavent: Funny thing is, austerity impact in Q1 was supposed to be payroll tax, but PCE is ok. Sequester in Q2 and beyond. What to expect from that?
How austerity, a bad economic idea, won over the West. “[A] modified form of the austerity that has characterized policymaking in Europe since 2010 is coming to the United States as well; the only questions are how big the hit will end up being and who will bear the brunt. What makes all this so absurd is that the European experience has shown yet again why joining the austerity club is exactly the wrong thing for a struggling economy to do.” Mark Blyth in Foreign Affairs.
@Neil_Irwin: Another steep decline in government spending, off 8.4%, including 11.5% defense spending drop. Looks like austerity is the culprit.
Debate: Chris Giles and Robin Harding, economic writers for The Financial Times, argue over the merits of austerity in depressed economies.
KLEIN: Reinhart and Rogoff aren’t the problem. The Republican Party is. “The real debate right now is with a Republican Party that won't permit any more stimulus, won't permit any more deficit reduction if it includes tax revenues, and won't even permit the federal government to make it easier for people to refinance their homes. That's a position that often gets called "austerity," and so cloaks itself in the work of more serious deficit hawks, but it's actually something very different, and much less coherent. And it's not the position of Reinhart and Rogoff, or Krugman, or even Joe Scarborough. In fact, it's not even obviously bridgeable with the positions of Reinhart, Rogoff and Krugman.” Ezra Klein in The Washington Post.
DIONNE: The economic whodunit. “The policy mystery of our time is why politicians in the United States and across much of the democratic world are so obsessed with deficits, when their primary mission ought to be bringing down high and debilitating rates of unemployment…[D]eficits don't really matter to many of the ideological conservatives shouting so loudly about them now. Their central goal is to hack away at government.” E.J. Dionne in The Washington Post.
KRUGMAN: The austerity narrative unravels. “Those of us who have spent years arguing against premature fiscal austerity have just had a good two weeks. Academic studies that supposedly justified austerity have lost credibility; hard-liners in the European Commission and elsewhere have softened their rhetoric. The tone of the conversation has definitely changed.” Paul Krugman in The New York Times.
EICHENGREEN: Central bank easing isn’t a currency war. It’s stimulus. “The BoJ and Fed were criticised for unleashing a torrent of capital flows into emerging markets. Now, in contrast, officials in other countries, while still less than fully comfortable about the consequences, realise that they would be even worse off had the Fed and the BoJ responded to them.” Barry Eichengreen in The Financial Times.
STEVENSON AND WOLFERS: Refereeing the Reinhart-Rogoff debate. “Lost in all this sound and fury is the real question that we should be debating: Is it appropriate to infer that high debt is driving slower growth, and hence governments need to take greater care before taking on debt? Or is lower GDP growth, or perhaps some other factor, the reason that debt burdens rise? If the observed correlations reflect the latter reason (and there are hints that it may), then the whole exercise has little relevance to public policy.”Betsey Stevenson and Justin Wolfers in Bloomberg.
MCNABB: Costs of uncertainty. “Our economists at Vanguard isolated changes in the U.S. economy that we determined were specifically due to increases in policy uncertainty…This gave us a picture of what the economy might look like if the shocks from policy uncertainty had not occurred. We estimate that since 2011 the rise in overall policy uncertainty has created a $261 billion cumulative drag on the economy…Without this uncertainty tax, real U.S. GDP could have grown an average 3% per year since 2011…In addition, the U.S. labor market would have added roughly 45,000 more jobs per month over the past two years. That adds up to more than one million jobs that we could have had by now, but don’t.” Bill McNabb in The Wall Street Journal.
Music recommendations interlude: Jesse Cook, “Havana.”
Top op-eds
BOWLES AND SIMPSON: We still want a grand bargain. “While the president's budget represents a significant step forward, it does not go as far as necessary to keep our debt declining as a percent of our economy…The plan we propose would achieve $2.5 trillion in deficit reduction through 2023, replacing the immediate, mindless cuts of the sequester with smarter, more gradual deficit reduction that would avoid disrupting a fragile economic recovery while putting the debt on a clear downward path relative to the economy over the next 10 years and beyond. Importantly, the plan would achieve this deficit reduction while respecting the principles and priorities of both parties.” Erskine Bowles and Alan Simpson in The Washington Post.
JOHNSON: Brown-Vitter remakes reform battlefield. “[S]mall banks are increasingly focused on the ways megabanks have achieved an unfair competitive advantage — primarily through implicit government subsidies. The most compelling voice at the forum last week was Terry Jorde, a senior executive vice president of the Independent Community Bankers of America. She made clear that small banks are being undermined by the reckless behavior of megabanks that are seen as "too big to fail.”" Simon Johnson inBloomberg.
REARDON: No rich child left behind. “What is news is that in the United States over the last few decades these differences in educational success between high- and lower-income students have grown substantially. One way to see this is to look at the scores of rich and poor students on standardized math and reading tests over the last 50 years. When I did this using information from a dozen large national studies conducted between 1960 and 2010, I found that the rich-poor gap in test scores is about 40 percent larger now than it was 30 years ago.” Sean F. Reardon in The New York Times.
LUCE: The age of impasse. “Barack Obama has not yet clocked up 100 days - he hits that milestone on Wednesday. Yet there is already an air of resignation about how the next four years are likely to play out. A large share of it comes from the realisation that the Republican party is not for turning after all.” Edward Luce in The Financial Times.
SHARKEY: The urban fire next time. “For the past several years all the ingredients have been in place for an urban crisis. Unemployment has hovered above 15 percent in many of our most distressed cities. High-poverty neighborhoods have spread beyond cities and into the suburbs. The housing collapse has left large sections of communities boarded up. And yet our cities have been relatively quiet…The question is, what comes next, now that the stimulus is over? A historical perspective on urban policy reveals a cycle in which periods of major investment are followed by periods of neglect, disinvestment and decline. This pattern is in the process of repeating.” Patrick Sharkey in The New York Times.
Super nerdy economics humor interlude: “Daron Acemoglu once tried to make a regression table. But his computer ran out of asterisks.”
2) Racial wealth disparity widens
Tame inflation means continued Fed easing. “Federal Reserve officials are likely to continue their easy-money policies at the central bank’s policy meeting on Tuesday and Wednesday, in part because several recent inflation measures have fallen well below the Fed’s 2% target…The Commerce Department reported Friday that its personal consumption expenditure price index--one of the Fed’s favored measures of consumer price inflation--was up 1.2% in the first quarter from a year earlier, well below the central bank’s target.” Jon Hilsenrath in The Wall Street Journal.
It’s Bernanke versus austerity. “We rarely get to see a major, nationwide economic experiment at work, but so far 2013 has been one of those experiments -- specifically, an experiment to try and do exactly what Beckworth and Ponnuru proposed. If you look at macroeconomic policy since last fall, there have been two big moves. The Federal Reserve has committed to much bolder action in adopting the Evans Rule and QE3. At the same time, the country has entered a period of fiscal austerity. Was the Fed action enough to offset the contraction? It's still very early, and economists will probably debate this for a generation, but, especially after the stagnating GDP report yesterday, it looks as though fiscal policy is the winner.” Milke Konczal in The Washington Post.
Explainer: Economic data for the week ahead. Amrita Jayakumar in The Washington Post.
Obama finalizes economic-policy roster. “Barack Obama has cemented the elevation of trade in his second-term agenda with the expected appointment of his top White House adviser on the global economy as the new US trade representative. Michael Froman, 50, who had initially been expected to stay on as Mr Obama's chief adviser for international economic affairs in the White House, will take over a significantly expanded trade agenda as the USTR.” Richard McGregor in The Financial Times.
Wealth gap between races has widened since the recession. “As of 2010, white families, on average, earned about $2 for every $1 that black and Hispanic families earned, a ratio that has remained roughly constant for the last 30 years. But when it comes to wealth -- as measured by assets, like cash savings, homes and retirement accounts, minus debts, like mortgages and credit card balances -- white families have far outpaced black and Hispanic ones. Before the recession, non-Hispanic white families, on average, were about four times as wealthy as nonwhite families, according to the Urban Institute's analysis of Federal Reserve data. By 2010, whites were about six times as wealthy.” Annie Lowrey in The New York Times.
Report: Hidden overseas accounts quietly rising to surface. “The Internal Revenue Service has recouped more than $5.5 billion under a series of programs that offered reduced penalties and no jail time to people who voluntarily disclosed assets they were hiding overseas, government investigators said Friday. In all, more than 39,000 tax cheats have come clean under the programs. Government investigators suspect that thousands of other taxpayers have quietly started reporting foreign accounts without paying any penalties or interest. The number of people reporting foreign accounts to the IRS nearly doubled from 2007 to 2010, to 516,000 accounts, a report by the Government Accountability Office said.” Stephen Ohlemacher in The Washington Post.
…And nations take a hard look at tax competition. “Across the world, the ability of multinationals to exploit cracks in the international tax system has ignited intense anger from an austerity-weary public…There has been a blurring of the distinctions between tax havens and larger industrialised countries that use fiscal measures as a source of competitive advantage to secure investment, jobs and revenues.” Vanessa Houlder in The Financial Times.
Measuring GDP is an art, not a science. “The change was long planned - changing anything in the national accounts takes a lot of planning - and reflects an international agreement in 2008. But the sudden appearance of an extra $500bn or so of GDP, an extra Belgium, understandably makes people a little queasy. The revisions are a reminder that while GDP may be the universal measure of economic success, like Olympic gold medals in sport, it is a mutable and arbitrary indicator. Nor is it the only way to measure economic output.” Robin Harding in The Financial Times.
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