Why Do We Have a Large Deficit?

It's the recession, stupid.

Paul Krugman has the data.

So when you here some cable TV pundit droning on about deficits and the stimulus or exploding health care costs, change the channel.

Get the economy back on track and allow the Bush tax cuts to expire, and the deficit problem is solved for the next decade. Then we can do something about the long term problems with health care and retirements costs.

The GOP and Health Care, Pt II

Regardless of how the Affordable Care Act fares in the Supreme Court, let us not forget the history of the individual mandate, the focus of the current constitutional challenge.

It is a Republican idea that Democrats adopted as a way of offering a path towards universal care that maintains the private insurance market and encourages personal responsibility. People talk in the abstract about how poisonous political partisanship has become, but this episode offers a concrete and particularly vivid example of this pathology. Let's be perfectly candid and acknowledge that this is not strictly a bipartisan phenomenon. Ted Kennedy openly worked with G.W. Bush on his signature education bill, No Child Left Behind. Bill Clinton worked with Newt Gingrich's Republican House to pass welfare reform.

However, the GOP could not only find it in themselves to work with Obama on healthcare reform, they took the extra step of passionately attacking a position that they formerly held simply, it seems, to try to deny Obama a legislative victory. If there is another example of either party similarly reversing its position on a major legislative initiative simply because the opposing party adopted it, then I don't know of it.

Ezra Klein lays out the depressing history of the GOP's former enthusiasm for the mandate.

The closest similar example was the Democratic party's rejection of Richard Nixon's attempt to achieve universal coverage through an employer mandate. However, this case was not at all the same, insofar as it was merely each party offering different approaches to the same problem. Late in his life, Ted Kennedy said that failing to reach an agreement with Nixon on this plan was his greatest political regret. Nonetheless, Kennedy did not formerly support a employer mandate and then withdraw his support simply because Nixon adopted it. Kennedy held out for a single payer system.

The 2008 Financial Crisis: A Primer

• The Great American Stickup: How Reagan Republicans and Clinton Democrats Enriched Wall Street While Mugging Main Street by Robert Scheer, Nation Books (September 7, 2010), 304 pages.
  
• All the Devils Are Here: The Hidden History of the Financial Crisis by Bethany McLean and Joe Nocera, Portfolio Hardcover (November 16, 2010), 400 pages.
  
• Griftopia: Bubble Machines, Vampire Squids, and the Long Con That Is Breaking America by Matt Taibbi, Spiegel & Grau (November 2, 2010), 202 pages.
  
• The Big Short: Inside the Doomsday Machine by Michael Lewis, W. W. Norton & Company; (March 15, 2010), 266 pages.
  
• Too Big to Fail: The Inside Story of How Wall Street and Washington Fought to Save the Financial System—and Themselves by Andrew Ross Sorkin, Viking Adult (October 20, 2009), 624 pages.
  
• Inside Job, Directed by Charles Ferguson, Sony Pictures Classics (2010)
  The Warning: Frontline PBS (http://www.pbs.org/wgbh/pages/frontline/warning/view/)
  
• Inside the Meltdown: Frontline PBS (http://www.pbs.org/wgbh/pages/frontline/meltdown/view/)
  
• Breaking the Bank: Frontline PBS (http://www.pbs.org/wgbh/pages/frontline/breakingthebank/view/)
  
• The Financial Crisis Inquiry Report, Financial Crisis Inquiry Commission
  

During the heady and depressing days of September and October, 2008, I had the distinct feeling that we were living through something historic. The scope and depth of the crisis that we faced was unprecedented. Now that more than a couple of years have passed, it is clear that the 2008-2009 recession was the most serious economic calamity that the country had faced since the Great Depression in the 1930s. It is also fairly clear that the only thing that kept it from being even worse was the aggressive response from the government and the Federal Reserve. This fact carries with it more than a little irony, since the collective steps taken by the government: TARP, the stimulus, the auto company bailouts, and the Fed pumping billions of dollars into the economy are not particularly popular. The reason for this is easy to understand psychologically. These steps were successful precisely because of what did not happen. On the other hand, what did happen was (and is) clearly perceptible and widely discussed. First, many of the very institutions that were largely responsible for the crisis received enormous amounts of cash and extremely generous terms of credit from the Fed. It is not difficult to understand why people would be infuriated by this. It is as if a bank-robber were patted on the head and asked if he would like more money before he made his getaway. Neil Barofsky, the special inspector general for the Troubled Asset Relief Program, recently wrote that TARP was largely a disappointment because of its failure to successfully address the massive foreclosure problem.

In the final analysis, it has been Treasury’s broken promises that have turned TARP—which was instrumental in saving the financial system at a relatively modest cost to taxpayers—into a program commonly viewed as little more than a giveaway to Wall Street executives.

It wasn’t meant to be that. Indeed, Treasury’s mismanagement of TARP and its disregard for TARP’s Main Street goals—whether born of incompetence, timidity in the face of a crisis or a mindset too closely aligned with the banks it was supposed to rein in—may have so damaged the credibility of the government as a whole that future policy makers may be politically unable to take the necessary steps to save the system the next time a crisis arises. This avoidable political reality might just be TARP’s most lasting, and unfortunate, legacy.

Second, the stimulus and auto bailouts contributed to massive budget deficits—the largest the country has seen since WWII. Third, after spending all of this money, the unemployment rate—the most relevant measure of economic health to average people—has remained stubbornly high.
Given the massive and historic nature of the crisis, it is not surprising that a lot of people have attempted to explain what really happened. Books have been written, films have been made, and the government has issued an official report. I have read several books, watched several documentaries, skimmed the official government report, and read countless news accounts and I now think that I have a fairly good understanding of just what happened.

The "what" of the 2008 crisis is fairly easy to understand. It was a classical negative feedback loop in which bad decisions spawned a series of other bad decisions that collectively resulted in a massive housing bubble. Michael Lewis describes this as a system of "bad incentives". Mortgage originators were incentivized to make loans regardless of the buyer's ability to pay, Wall Street was incentivized to buy these loans and bundle them into securities that they sold to an unsuspecting public, the rating agencies were incentivized to rate these securities AAA when many were worthless, and AIG was incentivized to sell scores of billions of dollars in credit default swaps as insurance on those securities. The result was that the financial system was nearly crippled when it suddenly found itself burdened by hundreds of billions of dollars of worthless assets and/or crushing liabilities and millions of home owners discovered almost overnight that they owed more on their houses than they were worth.

The more interesting and controversial issue concerns the "why". Everyone has an interest in knowing what caused this financial calamity so it can be avoided in the future. One of the most peculiar and perplexing aspects of this question is that how you answer this is greatly influenced by your political persuasion. The most vulgar expression of this appears as attempts by various groups to use the crisis as a partisan bludgeon. Democrats blame G.W. Bush despite the fact that the origins of the crisis go back into the Clinton administration, and Republicans blame Obama despite the fact that the crisis predated Obama's election.

Beyond these examples of partisan sloganeering there is a deeper issue of not political party, but political and economic ideology. It is at this level that conservatives are clearly at a disadvantage. Whatever else you want to say about the crisis, it was clearly a failure of the market. Through an uncountable series of free individual examples of buying and selling, we managed to nearly bring the world's economy to its knees. In many cases, these activities were not even in the best interest of the people who engaged in them. One of the essential characteristics of conservative dogma is that free markets are the best means to rationally and fairly create prosperous societies, and that any government regulation of those markets only interferes with the market's rational allocation of wealth. The experience of 2008 directly challenges this dogma. The market failed spectacularly. Government regulation failed only in its absence. Either the appropriate regulations did not exist (over-the-counter derivatives) or existing regulations were not enforced.

The GOP and Health Care

This Jonathan Chait essay offers the best account of the conservative view of health care I have read.

His comments accurately describe attitudes I have personally seen expressed by conservatives, who equate health insurance with a privilege to be earned. Providing health insurance--even private insurance--through a government subsidy is welfare for the undeserving poor. Receive chemotherapy and you are a welfare queen.

What I have never heard an explanation for is why no other advanced country on the planet takes this attitude. Even the most conservative parties in other advanced countries see basic health care as a fundamental right of citizenship. Margaret Thatcher had much to say on the subject. Only American conservatives take this position. It is despicable.

The Ones the Oscars Missed

The Oscars failed to recognize two performances this year that I thought were exemplary.

Best Supporting Actress
Jennifer Elhe in Contagion
This Steven Soderbergh medical thriller depicts in a scientifically literate way what would occur if the world were struck by a deadly and highly contagious strain of the flu. This actually occurred in 1918 when the Spanish Flu (inaccurately named, it probably originated in Kansas) killed 1% of the world's population.

Elhe plays a courageous CDC researcher who doggedly pursues a cure to the point of injecting herself with an experimental vaccine and then exposing herself to infection.

Best Supporting Actor
Kevin Costner in The Company Men
This inexplicably overlooked film offers the best fictionalized account of the financial crisis I have seen, this time from the perspective of the managerial class. Ben Affleck plays a fired sales manager who loses his dignity when he cannot find another job. Kevin Costner, in his best performance since at least Open Range, plays Affleck's brother-in-law, a carpenter with a working-class sensibility who offers to help Affleck make ends meet. It is a great performance in a great film.

Partisanship is a Weird Thing

What was John Boehner's reaction to today's report revealing that the country added 243,000 jobs in January?

 "We can do better."

What were the average number of jobs-per-month created over the entire 8 years of the Bush administration?

-7,740

What were the average number of jobs-per-month created during 8 years of the administration of the now-sainted Ronald Reagan?

167,729

Conservatism and the Financial Crisis

The 2008 financial crisis posed an ideological threat to the core of conservatism. The economic policy of the previous 8 years was based on the core conservative principles: lax regulation of business and tax cuts for high income earners.

There were two possible responses to this. The first required one to re-evaluate their economic assumptions. This is the route Alan Greenspan took. "Those of us who have looked to the self-interest of lending institutions to protect shareholders’ equity, myself included, are in a state of shocked disbelief" Greenspan told a Congressional Committee in Oct, 2008. Although the regulations he proposed adding were modest, at least he showed some willingness to re-evaluate his position when presented with new evidence.

The second approach shows no such willingness. The vast majority of conservatives went with the double down option. The conservative approach of low taxes for high income earners and deregulation of business didn't work, according to this approach, because G.W. Bush was simply too timid in his conservative policy prescriptions. This is the approach is taken by virtually all GOP elected officials and presidential candidates. It is a continuation of a trend recently noted by Paul Begala.

The story of the Republican Party in the last half century is a nearly unbroken march to the right. Nixon was more conservative than Eisenhower. Goldwater was more conservative than Nixon. Reagan was more conservative than Goldwater. Gingrich was more conservative than Reagan. And George W. Bush was more conservative than Newt.

Among the current crop of GOP candidates for president, even Romney--the candidate least trusted by conservatives to carry their standard--offers policies that are more conservative than Bush's. As Ezra Klein points out, Romney wants to retain the Bush tax cuts, and then add even more. And Romney is the least extreme among the candidates.

Clearly, this trend cannot continue indefinitely. GOP leaders are already out of step with the Republican rank and file when it comes to tax cuts. A majority of ordinary Republicans favor raising taxes on high income earners as a way to shrink the deficit. Yet amongst GOP leaders this is an apostasy.