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The Story of Our Time

By PAUL KRUGMAN
Published: April 28, 2013

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 [ http://www.nextnewdeal.net/rortybomb/reinhart-rogoff-week-later-why-does-matter ]; hard-liners in the European Commission and elsewhere have softened their rhetoric [ http://www.nytimes.com/2013/04/27/world/europe/eu-is-pressed-to-reconsider-cuts-as-economic-cure.html?pagewanted=all ]. The tone of the conversation has definitely changed.

My sense, however, is that many people still don’t understand what this is all about. So this seems like a good time to offer a sort of refresher on the nature of our economic woes, and why this remains a very bad time for spending cuts.

Let’s start with what may be the most crucial thing to understand: the economy is not like an individual family.

Families earn what they can, and spend as much as they think prudent; spending and earning opportunities are two different things. In the economy as a whole, however, income and spending are interdependent: my spending is your income, and your spending is my income. If both of us slash spending at the same time, both of our incomes will fall too.

And that’s what happened after the financial crisis of 2008. Many people suddenly cut spending, either because they chose to or because their creditors forced them to; meanwhile, not many people were able or willing to spend more. The result was a plunge in incomes that also caused a plunge in employment, creating the depression that persists to this day.

Why did spending plunge? Mainly because of a burst housing bubble and an overhang of private-sector debt — but if you ask me, people talk too much about what went wrong during the boom years and not enough about what we should be doing now. For no matter how lurid the excesses of the past, there’s no good reason that we should pay for them with year after year of mass unemployment.

So what could we do to reduce unemployment? The answer is, this is a time for above-normal government spending, to sustain the economy until the private sector is willing to spend again. The crucial point is that under current conditions, the government is not, repeat not, in competition with the private sector. Government spending doesn’t divert resources away from private uses; it puts unemployed resources to work. Government borrowing doesn’t crowd out private investment; it mobilizes funds that would otherwise go unused.

Now, just to be clear, this is not a case for more government spending and larger budget deficits under all circumstances — and the claim that people like me always want bigger deficits is just false. For the economy isn’t always like this — in fact, situations like the one we’re in are fairly rare. By all means let’s try to reduce deficits and bring down government indebtedness once normal conditions return and the economy is no longer depressed. But right now we’re still dealing with the aftermath of a once-in-three-generations financial crisis. This is no time for austerity.

O.K., I’ve just given you a story, but why should you believe it? There are, after all, people who insist that the real problem is on the economy’s supply side: that workers lack the skills they need, or that unemployment insurance has destroyed the incentive to work, or that the looming menace of universal health care is preventing hiring, or whatever. How do we know that they’re wrong?

Well, I could go on at length on this topic, but just look at the predictions the two sides in this debate have made. People like me predicted right from the start that large budget deficits would have little effect on interest rates, that large-scale “money printing” by the Fed (not a good description of actual Fed policy, but never mind) wouldn’t be inflationary, that austerity policies would lead to terrible economic downturns. The other side jeered, insisting that interest rates would skyrocket and that austerity would actually lead to economic expansion. Ask bond traders [ http://research.stlouisfed.org/fred2/series/DGS10 ], or the suffering populations [ http://krugman.blogs.nytimes.com/2013/02/23/austerity-europe-2/ ] of Spain, Portugal and so on, how it actually turned out.

Is the story really that simple, and would it really be that easy to end the scourge of unemployment? Yes — but powerful people don’t want to believe it. Some of them have a visceral sense that suffering is good, that we must pay a price for past sins (even if the sinners then and the sufferers now are very different groups of people). Some of them see the crisis as an opportunity to dismantle the social safety net. And just about everyone in the policy elite takes cues from a wealthy minority that isn’t actually feeling much pain.

What has happened now, however, is that the drive for austerity has lost its intellectual fig leaf, and stands exposed as the expression of prejudice, opportunism and class interest it always was. And maybe, just maybe, that sudden exposure will give us a chance to start doing something about the depression we’re in.

© 2013 The New York Times Company

http://www.nytimes.com/2013/04/29/opinion/krugman-the-story-of-our-time.html [with comments]


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House Republicans Eyeing New Hostage Opportunity


If you don't submit, I will destroy your puny world with this HAMMER OF THOR.

By Jonathan Chait
April 29, 2013 at 9:10 AM

The House Republicans are contemplating a new budget-hostage strategy, the the Washington Post [ http://www.washingtonpost.com/business/economy/gop-moves-away-from-entitlements-and-toward-tax-reform-in-budget-deal/2013/04/27/a3bfc5ac-add9-11e2-8bf6-e70cb6ae066e_story.html ( http://www.washingtonpost.com/business/economy/gop-moves-away-from-entitlements-and-toward-tax-reform-in-budget-deal/2013/04/27/a3bfc5ac-add9-11e2-8bf6-e70cb6ae066e_print.html )] reports in a story that is both highly useful and inadvertently Onion-esque. The hallmark of Onion news reporting is conveying insanity as if it were sane in a completely deadpan way. The news contained within the story is that the House GOP is thinking of tying the next increase in the debt ceiling to tax reform. Under this proposed strategy, the Post reports, “The debt limit might be raised for only a few months, with the promise of another increase when tax reform legislation passes the Senate.”

If you didn’t fall out of your chair when reading that apparently anodyne sentence, let me explain why you should have. In 2011, House Republicans undertook a novel and radically new dangerous political tactic of using the debt limit as a political bargaining chip. Before, the opposition party had treated the debt limit increase as a necessary step, though one they would posture over and use to flay the administration. (Senator Barack Obama followed this pattern.) The Republicans instead decided to actually threaten not to raise the debt ceiling unless Obama granted them policy concessions. This was extraordinarily risky. By mixing together a vote that was needed to prevent economic calamity with inherently contentious debates over the size of government, it turned routine budget disputes into a financial Cuban Missile Crisis.

The official party rationale [ http://www.businessinsider.com/paul-ryan-debt-ceiling-obama-spending-reduction-2013-1 ] for this extraordinary tactic was that, risky though it may be to fail to lift the debt ceiling, failing to reduce the debt was even riskier. An extreme imminent crisis justified extreme tactics. The risk of becoming Greece outweighed the risk of a debt-limit snafu (though it was not, of course, high enough to justify even a partial repeal of the Bush tax cuts).

President Obama has taken these arguments at face value, offering to meet the opposition halfway, or more than halfway, in order to strike a deal. He has publicly offered significant cuts to spending on retirement programs. But some Republicans don’t want that deal, the Post reports, because “The proposals, included in the president’s budget request, outraged seniors, and some Republicans fear that embracing them would be political suicide.”

Oh! So you threaten to melt down the world economy unless Obama agrees to cut spending on retirement programs, and then he offers to do that, and then you decide it’s too unpopular?

The decision that they no longer care about the thing they were prepared to unleash worldwide economic havoc to achieve has not caused them to abandon the debt ceiling as a hostage. (It’s the party’s Nelson Muntz–ian approach [ http://nymag.com/daily/intelligencer/2013/03/gop-has-won-a-budget-battle-not-the-war.html ] to resolving policy disagreements: “Gotta nuke something.") If obtaining retirement cuts went from so urgent it was worth threatening to nuke the world economy over to "meh," the next step is to figure out the next thing to nuke the world economy over. That thing, the Post reports, is tax reform.

But what is the GOP position on tax reform? It’s that tax reform must cut tax rates and not raise any revenue at all [ http://camp.house.gov/news/documentsingle.aspx?DocumentID=322003 ]. So House Republicans are prepared to refuse to raise the debt ceiling unless Democrats agree to let them cut tax rates without increasing revenue. Their extraordinary threat, first presented as a way to force a reduction in the deficit, is now being wielded to prevent a reduction in the deficit.

Copyright © 2013, New York Media LLC (emphasis in original)

http://nymag.com/daily/intelligencer/2013/04/house-republicans-eyeing-new-hostage-opportunity.html [with comments]


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2 More Grad Students Claim To Find Another Flaw In Reinhart-Rogoff Research

04/30/2013
http://www.huffingtonpost.com/2013/04/30/another-flaw-reinhart-rogoff_n_3185712.html [with embedded video report, and comments]


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Austerity Having A 'Devastating Effect' On Health, Researchers Find


Spanish youth hold placards reading 'We are forced to emigrate' or 'Justice!' as they take part in protest against government's austerity measures forcing them to emigrate.
(DOMINIQUE FAGET/AFP/Getty Images)

By Kate Kelland
Posted 04/28/2013 7:01 pm EDT

LONDON, April 29 (Reuters) - Austerity is having a devastating effect on health in Europe and North America, driving suicide, depression and infectious diseases and reducing access to medicines and care, researchers said on Monday.

Detailing a decade of research, Oxford University political economist David Stuckler and Sanjay Basu, an assistant professor of medicine and an epidemiologist at Stanford University, said their findings show austerity is seriously bad for health.

In a book to be published this week, the researchers say more than 10,000 suicides and up to a million cases of depression have been diagnosed during what they call the "Great Recession" and its accompanying austerity across Europe and North America.

In Greece, moves like cutting HIV prevention budgets have coincided with rates of the AIDS-causing virus rising by more than 200 percent since 2011 - driven in part by increasing drug abuse in the context of a 50 percent youth unemployment rate.

Greece also experienced its first malaria outbreak in decades following budget cuts to mosquito-spraying programmes.

And more than five million Americans have lost access to healthcare during the latest recession, they argue, while in Britain, some 10,000 families have been pushed into homelessness by the government's austerity budget.

"Our politicians need to take into account the serious - and in some cases profound - health consequences of economic choices," said David Stuckler, a senior researcher at Oxford University and co-author The Body Economic: Why Austerity Kills

"The harms we have found include HIV and malaria outbreaks, shortages of essential medicines, lost healthcare access, and an avoidable epidemic of alcohol abuse, depression and suicide," he said in a statement. "Austerity is having a devastating effect."

Previous studies by Stuckler published in journals such as The Lancet and the British Medical Journal have linked rising suicide rates in some parts of Europe to biting austerity measures, and found HIV epidemics to be spreading amid cutbacks in services to vulnerable people.

But Stuckler and Basu said negative public health effects are not inevitable, even during the worst economic disasters.

Using data from the Great Depression of the 1930s, to post-communist Russia and from some examples of the current economic downturn, they say financial crises can be prevented from becoming epidemics - if governments respond effectively.

As an example, they say, Sweden's active labour market programmes helped the numbers of suicides to fall there during its recession, despite a big rise in unemployment. Neighbouring countries with no such programmes saw large increases in suicides.

And during the 1930s depression in the United States, each extra $100 of relief spending from the American New Deal led to about 20 fewer deaths per 1,000 births, four fewer suicides per 100,000 people and 18 fewer pneumonia deaths per 100,000 people.

"Ultimately what we show is that worsening health is not an inevitable consequence of economic recessions. It's a political choice," Basu said in the statement.

(Reporting by Kate Kelland; Editing by Stephen Powell)

Copyright 2013 Thomson Reuters

http://www.huffingtonpost.com/2013/04/29/austerity-health-reduces-healthcare-increases-depression_n_3175576.html [with comments]


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Why Obamacare Is Not a 'Train Wreck' (Again)
APRIL 29, 2013
http://www.newrepublic.com/article/113049/obamacare-implementation-2013-busting-myths


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What if Simpson and Bowles threw a debt-reduction party and nobody came


Alan Simpson and Erskine Bowles
(Credit: AP/Carolyn Kaster)

The godfathers of unnecessary deficit plans write a plaintive op-ed as the world moves on

By Alex Pareene
Monday, Apr 29, 2013 07:00 AM CDT

Alan Simpson and Erskine Bowles would like you to know [ http://www.washingtonpost.com/opinions/a-deficit-reduction-compromise/2013/04/28/56b5a630-ae94-11e2-8bf6-e70cb6ae066e_story.html ] that they are still around and still have some plans and they would still like a “grand bargain.” The best friends forever were granted space on the Washington Post editorial page to make their case for common-sense deficit reduction achieved through a series of politically impossible compromises.

Simpson and Bowles have been speaking to the people, and the people agree with them!

No matter our audience, those we spoke with shared two things: a thirst for the truth about what it will take to right our fiscal ship and a willingness to be part of the solution so long as everyone is in it together.

Basically these two are nostalgic for December when it seemed like a “grand bargain” might actually happen:

In December, the two parties were as close as they’ve ever been on a plan to put our fiscal house in order. Although they did not reach agreement, we continue to believe that broader compromise is possible. In particular, President Obama deserves a lot of credit for his budget [ http://www.washingtonpost.com/wp-srv/special/politics/presidential-budget-2014/ ], which lays the foundation for constructive bipartisan discussions by incorporating the tough choices and politically difficult compromises [ http://www.washingtonpost.com/business/economy/republicans-embrace-obamas-offer-to-trim-social-security-benefits/2013/04/15/9de1c594-a448-11e2-9c03-6952ff305f35_story.html ] contained in the last offer he made during negotiations with House Speaker John Boehner in December.

While the president’s budget [ http://apps.washingtonpost.com/g/page/politics/president-obamas-2014-budget-proposal/94/ ] represents a significant step forward, it does not go as far as necessary to keep our debt declining as a percent of our economy. There are significant, substantive differences between the parties on key issues. But we hope that instead of retreating to their respective partisan corners, leaders in both parties will work to bridge the divide.

I don’t know what’s different about their new plan and don’t care. If it’s anything like their second plan, it’s a “compromise” that is further to the right than their initial plan, which called for massive tax increases. According to their Op-Ed, their new plan still raises the Medicare eligibility age and also, hilariously, cuts taxes. (“Our plan raises revenue through comprehensive tax reform that lowers rates….”) The Op-Ed is titled “A grand bargain is still possible. Here’s how.” Oddly, nothing in the Op-Ed actually explains how a “grand bargain” would actually pass either the House or the Senate. Thankfully, it seems extremely unlikely that one will.

Since the president idiotically appointed them to his deficit-reduction panel, Simpson and Bowles have become the most respected human beings in all of Washington. It was necessary, for two years, for every serious politician to announce that he supported “the Simpson-Bowles plan,” even though in reality almost no one actually did. Recently, though, their brand has lost some luster. The economy is barely growing and joblessness is still a major crisis. The longer that is the case (and it has already been the case for the entirety of the Obama administration) the less urgent deficit-reduction seems.

Simpson and Bowles, amusingly, released their newest plan on Friday, April 19 — which you may remember as the day everyone in the country was following the search for Dzhokhar Tsarnaev. This deprived the roll-out of a bit of the publicity that attended their previous plans. Also, since their initial plan, British and European austerity measures have caused massive suffering with no economic benefit. The famous Reinhart-Rogoff paper arguing that high debt led to economic contraction was found to be massively flawed [ http://www.salon.com/2013/04/17/whoops_turns_out_debt_doesnt_ruin_economies/ ].

In other words, the bipartisan “sound serious about the debt” consensus is suddenly in danger. Minutes after the Simpson-Bowles Op-Ed went up, the Post published an Op-Ed by Washington Post moderate liberal E.J. Dionne denouncing the debt obsession and calling for expansionary fiscal policy [ http://www.washingtonpost.com/opinions/ej-dionne-the-economic-whodunit/2013/04/28/6948f9a4-aea9-11e2-8bf6-e70cb6ae066e_story.html ]. (Madness!)

Politico reports [ http://www.politico.com/story/2013/04/democrats-debt-crisis-90717.html ] that, crazily, some moderate Democrats — not “wild-eyed liberals” but sensible centrists — now accept basic Keynsian economics. This being Politico, a voice of the Beltway elite consensus, this acceptance of mainstream economic opinion is still treated as exotic and bizarre.

“This group could make it even harder for President Barack Obama to strike a grand bargain because they increasingly see no immediate need for either new spending cuts or significantly more revenue, both of which they say could further slow the economy,” Politico says of these crazy whack jobs who believe that the unemployment crisis is more real and significant than long-term federal debt. Oh, no! (What is actually making it “hard” for the president to fix the deficit by lowering tax rates and making social insurance plans less generous is, weirdly, Republicans, who rhetorically support all of those things but who in practice prefer top-down class warfare to deficit reduction. And those Republicans have saved us all from a grand bargain.)

So it suddenly seems like a bit of cautious optimism about the elite conversation might be justified. Simpson and Bowles are being ignored. Deficit hysteria is a bit less fashionable than it has been. Congress, as we all know [ http://www.salon.com/2013/04/26/senate_fixes_the_part_of_the_sequestration_that_affects_rich_people/ ], is only responsive to rich people. But rich people are honestly better off if non-rich people can afford to pay rent and buy things. And some rich people seem to have begun to realize this. And we all owe Eric Cantor and Paul Ryan our thanks for killing Simpson and Bowles’ dream.

Copyright © 2013 Salon Media Group, Inc.

http://www.salon.com/2013/04/29/what_if_simpson_and_bowles_threw_a_debt_reduction_party_and_nobody_came/ [with comments]


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Wealth Gap Among Races Has Widened Since Recession

April 28, 2013
http://www.nytimes.com/2013/04/29/business/racial-wealth-gap-widened-during-recession.html [ http://www.nytimes.com/2013/04/29/business/racial-wealth-gap-widened-during-recession.html?pagewanted=all ] [with comments]; http://www.nytimes.com/interactive/2013/04/29/business/wealth-graphic.html


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No Rich Child Left Behind

April 27, 2013
http://opinionator.blogs.nytimes.com/2013/04/27/no-rich-child-left-behind/ [with comments]


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State Spending on Preschool Hits 10-Year Low

It looks like the Obama Administration's new early education plan -- which would be funded by a hike in the cigarette tax -- is even more sorely needed than advocates thought.
Apr 29 2013
http://www.theatlantic.com/national/archive/2013/04/state-spending-on-preschool-hits-10-year-low/275376/ [with comment]


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Money Buys Happiness and You Can Never Have Too Much, New Research Says

Richer countries are happier than poor countries. And richer families within richer countries are happier, too.
Apr 29 2013


http://www.theatlantic.com/business/archive/2013/04/money-buys-happiness-and-you-can-never-have-too-much-new-research-says/275380/ [with comments]; http://www.brookings.edu/research/interactives/2013/income-well-being


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IRS To Seek Info On U.S. Accounts At Caribbean Bank

* IRS gets court order for 'John Doe' summons -Justice Dept.
* Summons to go to Wells Fargo on correspondent account
* CIBC FirstCaribbean is focus of U.S. government interest

By Nanette Byrnes
Posted: 04/30/2013 6:04 pm EDT

April 30 (Reuters) - The U.S. Justice Department said on Tuesday that a federal court had authorized the Internal Revenue Service to seek information on U.S. taxpayers who may have accounts at Canadian Imperial Bank of Commerce FirstCaribbean International Bank (FCIB).

In a move resembling a recent IRS inquiry into Americans with Swiss bank accounts, the Justice Department said a court order would let the IRS serve a 'John Doe' summons seeking records of FCIB's U.S. correspondent account at Wells Fargo & Co . A correspondent account is a bank deposit account maintained by one bank for another bank.

The order would allow the IRS to identify U.S. taxpayers with "interests in financial accounts at FCIB and other financial institutions that used FCIB's Wells Fargo correspondent account," the Justice Department said in a statement.

"Our work here shows our resolve to pursue these cases in all parts of the world, regardless of whether the person hiding money overseas chooses a bank with no offices on U.S. soil," IRS Acting Commissioner Steven Miller said in a statement.

A spokesman for Wells Fargo said the bank would "review the summons and respond as legally required."

An FCIB spokeswoman said the bank intended to "cooperate with authorities in accordance with the respective laws of all jurisdictions involved" and to comply with legal and regulatory requirements. The bank was working with Wells Fargo to understand the court order, she said in a prepared statement.

FCIB, based in Barbados, has branches in 18 Caribbean countries. According to its website, the bank was formed in 2002 by Britain's Barclays Bank and Canadian Imperial Bank of Commerce (CIBC). In 2006, CIBC became the bank's majority shareholder, according to the website.

CIBC did not immediately reply to requests for comment.

FCIB does not have U.S. branches but it has a correspondent account in the United States at Wells Fargo, Justice said.

The IRS uses 'John Doe' summonses to get information on possible tax law breakers whose identities are unknown. "This John Doe summons directs Wells Fargo to produce records identifying U.S. taxpayers with accounts at FCIB and other banks that used FCIB's correspondent account," the statement said.

In a declaration filed to the court, a senior IRS revenue agent said many FCIB customers in the John Doe class may have been under-reporting income, evading income taxes, or otherwise violating the internal revenue laws of the United States.

The FCIB case stemmed from information from 129 customers of the Barbados bank and its predecessor banks who took part in an IRS voluntary disclosure program, the Justice Department said.

In a similar case in January 2013, a federal court allowed the IRS to serve a 'John Doe' summons on Switzerland's UBS AG , seeking records of Swiss bank Wegelin & Co.'s U.S. correspondent account at UBS.

That action was part of a wide-ranging U.S. government effort to crack down on tax avoidance by Americans.

Wegelin, Switzerland's oldest bank, in March agreed to pay nearly $58 million in penalties and said it would shut its doors after admitting to helping wealthy Americans evade taxes.

The serving of 'John Doe' summons on correspondent accounts is likely to become more common as the government widens its tax inquiries beyond Switzerland, Luxembourg and Liechtenstein, said William Sharp, a lawyer who represents taxpayers.

Copyright 2013 Thomson Reuters

http://www.huffingtonpost.com/2013/04/30/irs-caribbean-bank-accounts_n_3188601.html [with comments]