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July 21, 2010

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Latest Posts from Economist's View


Defense Spending and Deficit Reduction

Posted: 21 Jul 2010 12:42 AM PDT

The defense budget seems to be off the table when it comes to budget discussions, but it shouldn't be:

America's Unquenchable Defense Spending, by Michael Cohen: If there's one issue that seems to unite an increasingly divided and fractured capital, it is the ever-expanding federal budget deficit. ... Except one area of the federal budget is seemingly off limits: the $692 billion elephant in the room -- America's defense budget.
The calls from Republicans and Democrats for belt-tightening rarely, if ever, seem to extend to the military. Deficit hawks in the House have even demanded that an amendment to the $37 billion Afghanistan spending bill that would allocate $10 billion to prevent teacher layoffs ... be paid for with offsetting spending cuts. No such demands have been made about war spending, which since 9/11 tops more than $1 trillion. ...
Yet, outside ... Social Security, Medicare and Medicaid, the defense budget is by far the biggest chunk of the nation's fiscal pie. Aside from money allocated for the Pentagon there is another more than $300 billion in additional outlays for costs like homeland security, military aid, veteran's benefits and military-related interest on the national debt. That's more than $1 trillion in taxpayer money -- or about $3 out of every $10 in tax revenue.
And while the defense budget has been growing for decades, since 9/11 the numbers have jumped significantly. ... [T]he money is not just going to pay for wars in Iraq and Afghanistan. Nonwar defense spending makes up more than a third of the increase.
All of this is happening at a time when the U.S. faces no major foreign rival and al-Qaida, according to the nation's intelligence chiefs, has been reduced to a mere 400 to 500 key operatives in Pakistan and Afghanistan. In Afghanistan alone, the U.S. is spending $100 billion and deploying 100,000 troops to face an enemy that has only about 50 to 100 operatives in the entire country.
Trimming the defense budget will not solve the country's deficit woes, but it would certainly help. Moreover, smart spending cuts would allow lawmakers to divert money toward creating jobs and growing the economy -- steps that would, over time, do far more to reduce the deficit. A recent report by the Sustainable Defense Task Force ... found nearly $1 trillion in possible savings over 10 years. ...
[I]f Congress is willing to consider cuts to Social Security and Medicare, or won't even fund money for teachers and benefits for the unemployed out of deficit fears, why should the defense budget be off the table?
Of course, as the report also suggests, the surest way to truly reduce U.S. military spending would be to adopt a policy of greater "restraint" that makes the deployment of U.S. forces a true last resort, minimizes overseas commitments and stops subsidizing the defense responsibilities of our allies in Europe and Asia. ...

In the short-run, cuts in defense spending (or more "restraint") could be used to temporarily fund recession fighting and job creating programs. In the longer run, as those expenditures expire, the reductions in defense spending would help with the debt problem.

links for 2010-07-20

Posted: 20 Jul 2010 11:01 PM PDT

Unemployment Benefits and Recessions

Posted: 20 Jul 2010 05:58 PM PDT

It's very likely that another extension of unemployment benefits will be needed:

Unemployment Extension Fight Is Just Beginning, Real Time Economics: ...Lawmakers voted today to continue eligibility for extended unemployment benefits through late this year. But if history is any guide, there will likely be at least one more call for an extension. Meanwhile, the legislation allows job seekers to receive unemployment benefits for up to 99 weeks, depending on their state. In the coming months, the number of recipients who remain unemployed beyond 99 weeks could increase substantially.

Un-comp

According to an analysis by Goldman Sachs economist Alec Phillips..., unemployment benefits are extended an average of 23 months following the peak unemployment rate is hit. In the current downturn, the peak in the jobless rate — 10.1% — came in October 2009, just 8 months ago. To reach the average, unemployment benefits would need to be extended through September 2011, which would require another act of Congress.

Meanwhile, that extension would just cover the average. In past recessions, unemployment extensions continued until the unemployment rate dropped below 7.5%. That's a long way from the 9.5% rate recorded in June. Indeed, economists in the latest Wall Street Journal forecasting survey see the rate still elevated at 8.6% in December 2011 ... — it's going to take a long time before the unemployment system returns to something resembling normal.

However, just because it's needed doesn't mean it will actually happen. Opposition from Republicans made it hard to pass the extension that went through today -- it had to be weakened considerably to get enough support to pass -- and the next time will be even harder.

One more piece of news about labor market conditions:

Wages Fail to Keep Pace with Inflation, Real Time Economics: Weekly wages rose by just $6 in the past year, failing to keep up with the rise in inflation, according to a Labor Department report on second quarter earnings.

Median weekly earnings increased slightly to $740 in the second quarter from $734 a year ago, a 0.8% increase. The consumer price index, meanwhile, rose 1.8% in the same period.

Excess supply in the labor market — 14.6 million Americans were unemployed as of June — has helped keep wage growth in check.

All of the signs are pointing to an agonizingly slow recovery, yet policymakers are sitting on their hands, or worse, giving in to those who would like to repeat the mistakes of the past by cutting the deficit, and hence aggregate demand, at a time when inadequate demand is the problem. The response from policymakers to labor market conditions and to the recession more generally has been inadequate, and there's no indication that's going to change.

Economic Conditions and Election Outcomes

Posted: 20 Jul 2010 11:43 AM PDT

Economic conditions don't explain 100% of the variation in election outcomes, of course, but failing to take account of the importance of economic conditions in determining election outcomes in the formulation of election strategy is a mistake:

On Writing about the Economy and Elections, by John Sides: David Paul Kuhn of Real Clear Politics has a piece today taking issue with Ezra Klein and Paul Krugman for over-hyping the role of the economy and elections. Klein, relying in part on a graph I supplied him, wrote:

For decades now, political scientists have been building election models that attempt to predict who will win in November... All they really need to know about is the economy.

Krugman wrote:

Midterm elections, where turnout is crucial, aren't quite like presidential elections, where the economy is all.

Kuhn objects that the economy isn't all. ... He quotes two political scientists and election forecasters, James Campbell and Alan Abramowitz, who say that "the economy is a junior partner" and "one factor and not always the most important one," respectively. Then he describes a series of individual elections that illustrate the lack of complete correspondence between election outcomes and economic performance...

Kuhn is certainly right that we should talk about the economy and elections in probabilistic terms like "is associated with" or "is strongly related to." And he is right that campaigns matter on the margins. But I'm not really sympathetic to the motivation behind his piece.

On one level, his literal reading of Klein and Krugman is unnecessarily uncharitable. These are smart guys. ... They're just writing for a mass audience and so wrote cleanly and boldly without a bunch of quasi-academic qualifiers and caveats.

In fact, I think it's extremely helpful for Klein and Krugman to make this case boldly... Here's the position I find myself in as a political scientist. Economic performance explains some large fraction of the variation in presidential election outcomes, presidential approval, trust in government, and many other things. But most political journalism ignores this fact and prefers to talk about tactics and narrative.

Case in point: how many of the 15 "political experts" writing in the New York Times's forum on "how Obama can rebound" emphasized the simple fact that the economy is weak and so Obama will not rebound significantly until it turns around? One. Mark Blumenthal. The rest wrote about policy hobbyhorses, strategy, and a bunch of other stuff that could matter "at the margins" but probably won't, and certainly won't matter as much as economic performance over the rest of his term.

It's actually valuable to state the economic case as starkly as Klein and Krugman did. ... The view of many, if not most, political journalists is miles from where political science stands. If it takes a statement like Klein's (or some of mine) to pull that view towards one that acknowledges that economic performance is the key driver, then that's fine with me.

And it appears to be a lesson that Obama is having a surprisingly hard time learning given his strong connections to the "it's the economy, stupid" crowd. Inflation and unemployment are particularly important in election outcomes. However, inflation is nowhere in sight -- the worry right now is about falling prices driven by poor economic conditions, not inflation -- and fighting inflation is mainly the Fed's responsibility, so reducing unemployment through job creation should be the main focus of the Obama administration. Even if there's little chance that legislation can make it through Congress, the perception that Obama is fighting for the unemployed rather than for banking and big business interests more generally would be very helpful. There have been a few speeches lately where he rebukes the GOP over unemployment compensation, but nothing like what is needed if Obama wants to change the perception of what and who his administration stands for.

The lack of effort and leadership on the unemployment and jobs front has been a big disappointment. I'd like to see this change, but it may be too late to alter perceptions significantly before the midterm elections, and the same is true for legislation designed to stimulate job creation. However, the unemployment problem will extend far past the midterms -- it may still be a problem two years later when the presidential election rolls around -- and, elections or not, there are millions and millions of people in need of jobs. It's time for the administration to get that, and start doing all it can to help with the unemployment problem even though the payoff in November won't be as large as it could have been if they'd figured this out long ago.

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