SOTU, The Morning After

February 13th, 2013 at 12:53 pm

There’s a plethora of analysis, criticism, praise, and commentary in this AMs papers on the big speech last night, to which I have only a little to add.  As usual, start with Wonkbook but as far as I could absorb, the general consensus is that the President laid out an ambitious, progressive agenda that will be a very heavy lift in Congress.

So here are a few random thoughts on the political economy of the domestic economic parts of the speech:

–Clearly, here was a democratic president thinking about what government can do to help solve the most important economic challenge we face: the persistent gap between economic growth and middle class prosperity and opportunity.  President Obama was elected twice to address that issue—it is what he and the VP ran on and won on both times.  In his first term, his major economic challenge was to first restore growth, and he was somewhat successful, though that growth is still too slow.  I heard last night’s domestic agenda as re-growing the connective tissue that would once again deliver more of the growth to middle class and poor.

–Note that this is not obviously a “growth agenda.”  This idea that our economy will grow faster and better and longer if the middle class gets a larger slice of the growth sounds right but I’ve not seen the evidence, and I’ve looked pretty hard for it (I’ve got a paper on this coming out soon).  But there is no question that a recovery that is more broadly shared is more just, feels a lot better, and, if it persists, can begin to chip away at the true scourge of persistent inequality: diminished opportunity and mobility.

–A number of pieces this AM provide a useful reminder that we make too big a deal out of these speeches.  True…and by sometime later today, I expect the denizens of this benighted burg to fall back to the squabbles and scrums at a much lower altitude than the President’s soaring rhetoric.  But that doesn’t mean there’s nothing to see here folks, move along.

IMHO, the smart thing to do is to pull out one or two pieces (of the domestic economic agenda) and work them hard.  I nominate the minimum wage increase and the “fix-it-now” infrastructure.  The first may seem like a reach given this Congress but remember, the federal minimum will go up again someday, so we might as well start the fight, and don’t forget that the federal wage floor was last raised under GW Bush (and his dad signed on to an increase as well back in 1989)!  Re the infrastructure, same thing: we’re going to address our deteriorating public goods problem at some point, and now makes sense on various levels (low borrowing costs, high unemployment).  Also, R’s have historically supported this as well and for good reasons: a strong public infrastructure is an important input to businesses.

–Deficit reduction by itself is not an economic plan: Nine beautiful words, tightly summarizing a critical truth.

–Um, how ya gonna pay for all of this?  Right…that is a tough one.  But perhaps not as impossibly tough as you’re thinking.  The minimum wage has no budgetary costs.  We eventually have to pay for infrastructure and while the revenue has to come from somewhere, it doesn’t have to come from the income tax.  Alternatives include federal gas taxes or figuring out ways for the infrastructure itself to spin off revenue—tolls, user fees—thus providing a source for investment returns for the public/private partnership the President mentioned.  Universal pre-K really does seem to come awfully close to paying for itself–or better–in higher earnings and reduced social costs, but the payback is way down the road and federal politics heavily discounts the future, so that one’s a truly heavy, by truly worthy, lift.

 

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7 comments in reply to "SOTU, The Morning After"

  1. D. C. Sessions says:

    Alternatives include federal gas taxes or figuring out ways for the infrastructure itself to spin off revenue—tolls, user fees—thus providing a source for investment returns for the public/private partnership the President mentioned.

    How much of the revenue from collecting tolls goes to paying for the roads and how much goes to paying for collecting the tolls? Every time I’ve looked into that, tolls come up as one of the most inefficient ways to raise revenue ever invented. Huge costs to the public, tiny revenues to pay for improvements.


  2. Tyler Healey says:

    You must know by now that federal taxes destroy money; they do not pay for anything. You must know this.

    Stephanie Kelton, L. Randall Wray, Scott Fullwiler, Pavlina Tcherneva, Warren Mosler – these are all people who know a ton about finance and they will tell you that federal taxes destroy money.

    The purpose of federal taxes is to quell inflation and reduce bad behavior, such as pollution.


  3. Fred Donaldson says:

    “This idea that our economy will grow faster and better and longer if the middle class gets a larger slice of the growth sounds right but I’ve not seen the evidence,”

    One of the great benefits of helping the middle class is that it encourages folks to work harder to get into the middle class. Why attend college when you don’t get a decent job? Why work two jobs when all you do is lose your food stamps? Why send your wife out to work if she only makes a couple bucks after child care, etc.?

    If people live better on all the public assistance programs than they do working, why work?

    In short, a higher minimum wage lifts many out of poverty and welfare programs for the working poor, and higher wages encourage more folks to do what they can to rise to the middle class and get those decent jobs.

    Middle class is a financial situation, not a social one, and too many economists conflate financial and social.


    • urban legend says:

      “This idea that our economy will grow faster and better and longer if the middle class gets a larger slice of the growth sounds right but I’ve not seen the evidence, and I’ve looked pretty hard for it (I’ve got a paper on this coming out soon). But there is no question that a recovery that is more broadly shared is more just, feels a lot better, and, if it persists, can begin to chip away at the true scourge of persistent inequality: diminished opportunity and mobility.”

      I simply don’t understand the agnosticism on this. Krugman seems to share it, too, but on sheer economic logic Stiglitz seems to have the much better argument. The biggest multipliers should come from the middle and lower income people having more money because they spend it. The same pot of money taken from the wealthy and given to everyone else will have minimal impact on the discretionary income of the wealthy and a huge impact on the discretionary income of everyone else. A standard curve on marginal propensity to consume should demonstrate that. Moreover, the wealthy spend less of it and a much larger percentage is spent outside the country. (But lest we get dragged too far into the ‘re-distribution weeds, that pot “taken from” the wealthy initially will come back to them in stronger income and asset values when the economy grows faster.)

      Don’t we also believe that higher consumer confidence leads to business confidence in the future of demand (a completely different animal than the VSPs’ idea of “business confidence), and therefore to job-creating business investment? Which is likely to generate higher consumer confidence, a barely noticeable change in the discretionary income of the wealthy that has zero impact on their lifestyle, or an income bump for middle and lower income people that has a disproportionate impact on their discretionary income?

      Evidence? How about real life evidence? Bush focused his 2001 and 2003 tax cuts on the wealthy, and their stimulus effect was puny — just as one thinking about the marginal propensity to consume (and to consume within the U.S. economy) would (and did) predict. How about much growth rates before 1980 or so before the current gross levels of inequality took hold? For that matter, how about the overall economic growth in the later 1990s, when lower and middle income people kept pace for a change in income growth with the growth for higher income people (and the higher income segment got a large part of their income boost from capital gains windfalls)? How about the 1930s after Roosevelt switched away from budget balancing? How about World War II?

      It seems to me that the Bernstein-Krugmans and the Stiglitzes may be talking past each other. The sluggishness may be less due to inequality per se than the fact that, as suggested above, the growth in inequality has also brought about relative weakness or even actual decline in discretionary income for the majority of the population. That to me is at least implicit in the Stiglitz position. If we have rampant inequality that mostly means the middle class cannot buy solid gold plumbing fixtures or that condo in Nice — but can (especially on one parent’s income) go out to eat, have decent housing, get around the country, take some vacations, play some sports, have decent health insurance, save for their retirements and their kids’ college educations at least at a good state university — we would be having an entirely different conversation. That especially would be true if, despite massive wealth among the top 1/10th of one per cent, poverty had been virtually eliminated and the entirety of the 99% can consider themselves middle class.

      It sure seems a lot more economics nuts-and-bolts than a bit of feel-good kumbaya singing.


    • Eric L says:

      Also, for the hard evidence (and a thorough debunking of Krugman) see Steve Randy Waldman:

      http://www.interfluidity.com/v2/3830.html
      http://www.interfluidity.com/v2/3972.html


  4. Nick Batzdorf says:

    “Deficit reduction by itself is not an economic plan: Nine beautiful words, tightly summarizing a critical truth”

    (Actually I believe he said “alone,” not “by itself.”)

    I was going to say, to me that was the most important line in the whole speech (never mind that “alone” should have been removed). Why have Democrats not being shrieking that from the very beginning?

    And why are you the only talking head who noticed that line?!


  5. Jill SH says:

    “The minimum wage has no budgetary costs.”

    In fact, it may be a gain. All those minimum earners get a 20+% pay increase. It also means that there’s that much increase in their payroll taxes.

    As much as we talk about raising the earning limits to raise more funds for Social Security, isn’t there also a bundle of money coming in from a rise in the minimum wage?

    If wages and salaries hadn’t stagnated for the last 30 years, wouldn’t Social Security be in a much better place now?


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