Jeff Madrick is the director of the Bernard L. Schwartz Rediscovering Government Initiative at the Century Foundation and editor of Challenge Magazine. His new book is Seven Bad Ideas: How Mainstream Economists Damaged America and the World.
Among the many forces contributing to the recent epidemic of tension between police and mostly black urban communities, from Ferguson to Cleveland to Baltimore, one in particular has been all too little acknowledged: America’s child poverty crisis.
Social Security may well be the most popular social program in America. Its popularity may explain why it has seemed easy to frighten the general public about Social Security’s demise with an alarmist campaign that has been underway since the 1990s and early 2000s, and continues today.
What would have happened if the federal government had saved Lehman Brothers back in September 2008? The nation would certainly not have passed the Dodd-Frank financial reforms. Nor would there have been enormous pressure on other federal agencies, including the Securities and Exchange Commission and the Commodities Futures Trading Commission to become more vigilant.
Despite a near perfect record of misses, inflation hawks that help set the Fed’s interest rate policies are making influential public pronouncements again. The public, policymakers, and the media should recognize not merely how flawed their judgment has been in the past, but that their conclusions are the same almost no matter the circumstances.
The interest rate policies for the US are set in secret by the Federal Open Market Committee (FOMC) at regularly scheduled meetings eight times a year. Occasionally, the chairman of the FOMC, who is also the chairman of the central bank, the Federal Reserve, holds emergency conference calls as well.
America has the second highest child poverty rate of the thirty-five nations measured by the United Nation Children’s Fund. Yet only two fifths of poor children in the US have access to Head Start. Our political leaders have largely overlooked the connection between poverty, poor educational attainment, and even neural malfunctions—and the extent to which effective poverty reduction itself can correct the problem.
The powerful findings of Thomas Piketty and other economists have challenged long-held assumptions that America is a meritocracy. But the problem of inequality is an inadequate description of the situation. We now have stagnating incomes for a large majority of Americans and runaway incomes at the very top. This is not so much “inequality” as a complete lack of growth for much of the country.
We hear time and again from those who should know better that government is a hindrance to the innovation that produces economic growth. Above all, the government should not try to pick “winners” by investing in what may be the next great companies. Many orthodox economists insist that the government should just get out of the way. A new book, The Entrepreneurial State by Mariana Mazzucato, forcefully documents just how wrong these assertions are.
By making jobs the centerpiece of the speech, President Obama gave one of his best State of the Union addresses. But the jobs situation is not merely a concern. It is a crisis. Minorities and the young in particular have been battered. And the most necessary measure of all—continued fiscal stimulus to encourage growth—is not being entertained.
Our current employment crisis has less to do with technology or globalization than with the administration’s failure to adopt policies to support young workers. Consider the bleak prospects of young people entering the labor force today: the portion of people aged twenty to twenty-four who have jobs has fallen from 72.2 percent in 2000 to just 61.5 percent. Meanwhile, the median earnings of men between the ages of sixteen and twenty-four working full-time has fallen by nearly 30 percent since 1973. For women, the median has fallen by 17 percent. As Andy Sum, an economist at Northeastern University who has studied youth unemployment for many years, has shown, if you are out of work or underemployed during those initial years of adulthood, chances are far higher you will be unemployed, poor, or dependent on welfare later on.
The sequester is dangerous, but not for the reasons we think. Contrary to what some alarmists predicted, there is little evidence that the automatic, across-the-board cuts to the US budget that went into effect on Friday are causing cataclysmic harm. The stock market has risen slightly to near record heights, and most economists agree that the $85 billion down payment this year on about $1 trillion in cuts over the next ten will not trip the economy into recession. Recent polls, meanwhile, indicate that a large part of the electorate has no opinion on the sequester. But the real danger lies in the misguided deficit-cutting mania that created it in the first place. It is exactly the opposite of what the economy needs both in the short run and the long term.
Two years ago, Treasury Secretary Timothy Geithner praised the widely criticized $700 billion bank bailout of late 2008—known as the Troubled Asset Relief Program, or TARP—as “perhaps the most maligned yet most effective government program in recent memory.” By late 2010, losses to the government had turned out to be …
The frantic negotiations in Washington to avoid the fiscal cliff in January may appear to be mostly a battle over higher taxes on the rich. At the moment, negotiations seem to have hit a temporary impasse. But the strenuous debate between President Barack Obama and House Speaker John Boehner over how to stave off the $700 billion or so of automatic spending cuts and tax hikes scheduled for 2013 is obscuring a larger and far more disturbing issue: whichever way the negotiations go, the result will be slow economic growth next year at best, and possibly outright recession.
With domestic policy as the theme of Wednesday’s presidential debate, the Obama campaign is facing a weakening economy. The Commerce Department just reported that GDP grew at an annual rate of only 1.3 percent in the second quarter. Job growth has been tepid, with continued high unemployment and underemployment. When one counts all those looking for full-time jobs and unable to get them, the true unemployment rate is close to 17 percent. Meanwhile, the US faces looming threats of a new European recession and a slowdown in China and other parts of the developing world.
“The essential American soul,” claimed D.H. Lawrence, “is hard, isolate, stoic, and a killer.” While the rejection by five state governments of the Affordable Care Act’s Medicaid expansion may not precisely illustrate Lawrence’s heated observation, it does suggest a contemporary vein of cruelty in America that is deeply disturbing.
Except for the US, no rich nation in the world fails to provide comprehensive health care that is free or inexpensive to its entire population. Yet roughly 50 million Americans, 16 percent of the population, have no health insurance at all; most of them are relatively poor and nearly one …
The announcement Wednesday by Germany’s chancellor, Angela Merkel, that her nation is ready to discuss economic stimulus to keep Greece in the eurozone is—if serious—a hugely important development. But the critical test will be what policies emerge from this announcement. After more than three years of unsuccessful efforts to tackle the problems in Greece and other countries through imposed austerity measures in return for bailout funds, observers might be forgiven for thinking there are no solutions to the continuing eurozone crisis. Yet the eurozone is not stuck between a rock and a hard place. The tragedy is that effective solutions are available, but the stronger European nations, led by Germany and the European Central Bank, seem incapable of adopting them, or perhaps even thinking clearly about them. The crisis is not purely a consequence of Greek intransigence, by any means.
The European Union has become a vicious circle of burgeoning debt leading to radical austerity measures, which in turn further weaken economic conditions and result in calls for still more damaging cuts in government spending and higher taxes. Rarely do we get so stark an example of bad—arguably even perverse—economic thinking in action. How could the EU so misread history and treat with contempt the teachings of John Maynard Keynes, who showed that during recessions governments must expand economies through spending and tax cuts, not the opposite? By ignoring this, European policy makers will deepen, not solve, the financial crisis and millions of people will suffer needlessly.
With early Tuesday’s abrupt evacuation of Zuccotti Park, the City of New York has managed—for the moment—to dislodge protesters from Wall Street. But it will be much harder to turn attention away from the financial excesses of the very rich—the problems that have given Occupy Wall Street such traction. Data on who is in the top 1 percent of earners further reinforces their point. Here’s why.
Though the situation is often described as a problem of inequality, this is not quite the real concern. The issue is runaway incomes at the very top—people earning a million and a half dollars or more according to the most recent data. And much of that runaway income comes from financial investments, stock options, and other special financial benefits available to the exceptionally rich—much of which is taxed at very low capital gains rates. Meanwhile, there has been something closer to stagnation for almost everyone else—including even for many people in the top 20 percent of earners.
The financial crisis is the next great test: it will mark the success of one of the great political and social experiments of our time if the Europeans come together to remedy it; it will be tragic for Europe and for the world if they do not.
Private financial firms overwhelmingly created the conditions that led to catastrophe. The risk of losses from the loans and mortgages these firms routinely bought and sold was significantly greater than regulators realized and was often hidden from investors. Wall Street bankers made personal fortunes all the while, in substantial part based on profits from selling the same subprime mortgages in repackaged securities. Yet thus far, federal agencies have launched few serious lawsuits against the major financial firms that participated in the collapse, and not a single criminal charge has been filed against anyone at a major bank.
Since the beginning of last week, the shift in the attitude of the press toward Occupy Wall Street—and the support across the country the movement is suddenly drawing—is remarkable. The occupation started on September 17 and grew from the beginning. But since two Sundays ago, unions have joined a large and boisterous march and few if any hesitate any longer to visit Zuccotti Park. Friends now bring their children. The press, almost uniformly derisive during the initial weeks, shows signs of understanding that the group touches a deep-seated anger and confusion in America. President Obama had to respond to a question about it last week, and said he understood the concerns. Occupy Wall Street is truly national—indeed international.
Gretchen Morgenson and Joshua Rosner’s Reckless Endangerment: How Outsized Ambition, Greed, and Corruption Led to Economic Armageddon boldly and passionately asserts that the risk-taking of Fannie Mae and Freddie Mac was a major element in causing the housing bubble. This claim is not substantiated by persuasive analysis or by any hard evidence in the book. Yet it is being used by politicians and pundits to soften criticism of private business and by lobbyists and others who would water down the new regulations passed by Congress under the Dodd-Frank Act.
A debate has erupted anew in Washington over whether Fannie Mae and Freddie Mac caused the credit crisis of 2007 and 2008. Their critics claim that these two Government Sponsored Enterprises (GSEs) deserve a lot of the blame because they encouraged mortgage lending to low-to-middle-income Americans, a goal that Congress required and Bill Clinton advocated. The debate, which faded after a brief fluorescence in 2008, has been revived by a new book, Reckless Endangerment, by the respected New York Times reporter Gretchen Morgenson and the dogged financial analyst Josh Rosner.
Among the economic fallacies embraced in Congressman Paul Ryan’s budget proposal, two are particularly egregious: that getting rid of Medicare will reduce health care costs and that enacting yet further tax cuts for the rich will spur growth and investment.
Critics on the left are up in arms because Ryan’s proposal to force Medicare recipients to buy private insurance will raise the amount those now under 55 will pay when they are old enough to get Medicare by an average of $6,000 a person. In other words, critics say, we are trying to cut health care costs—and supposedly reform it through more privatization—on the backs of future elderly Medicare recipients. But the Ryan plan won’t reduce health care costs.
With its revealing accounts of the Wall Street practices that led to the recession of 2008 and 2009, the recent report of the Financial Crisis Inquiry Commission (FCIC) is the most comprehensive indictment of the American financial failure that has yet been made. During two years of investigations, the commission accumulated evidence of many hundreds of irresponsible, self-serving, and unethical practices by Wall Street bankers and systematic tolerance of them by regulators.
President Obama’s budget proposal this week shows just how thoroughly austerity economics now dominates the policy debate for both Democrats and Republicans. This emphasis is not new: Obama had already signaled he was giving special priority to cutting the deficit well before the November elections, when he named a bipartisan panel to make recommendations on how to deal with future deficits. It was hardly an objective panel, headed by two deficit hawks, former Clinton White House Chief of Staff Erskine Bowles and retired Wyoming Republican Senator Alan Simpson.
Not so very long ago, some economists feared Obama’s stimulus plan was not doing enough, quickly enough to rescue the economy. With US government spending now surpassing revenues by about 10 percent of GDP, those voices have been muffled.
Many recent books and articles by economists and policy analysts ask how the US can recover rapidly from the worst economic crisis since the 1930s. They usually merely assume that the ideal objective is to return to the stable economic growth that preceded the crisis of 2007 and 2008. The underlying assumption is that once adjustments are made, the economy will continue again much along the path it had for a quarter-century. This optimism isn’t at all warranted.