Deficit is Dropping but is there a Real Recovery?

Bill Black: With surge in stock market, the wealthier are paying more taxes but working class wages are not rising and unemployment remains high, so this does not mean a sustained recovery of the real economy is underway

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PAUL JAY, SENIOR EDITOR, TRNN: Welcome to The Real News Network. I’m Paul Jay in Baltimore. And welcome to another edition of The Black Financial and Fraud Report with Bill Black, who now joins us from Kansas City, Missouri.

Bill is a associate professor of economics and law at the University of Missouri-Kansas City. He’s the author of the book The Best Way to Rob a Bank Is to Own One.

Thanks for joining us, Bill.

BILL BLACK, ASSOC. PROF. ECONOMICS AND LAW, UMKC: Thank you.

JAY: So the Congressional Budget Office is saying the deficit is getting lower quickly, something like $203 billion off the deficit, the lowest it’s been since 2008. What is your take on–well, first of all, why do you think this is happening? What do you make of the significance of it?

BLACK: Well, the deficit is in fact falling, and the deficit is primarily falling because the United States has had some economic growth instead of following austerity and being forced back into a gratuitous great recession and indeed great depression that we have in much of the periphery of Europe. When you have some economic recovery, then tax revenues increase and expenditures–or at least many expenditures–tend to fall simultaneously. And all of that tends to–especially with marginal income tax rates that give higher tax when you get higher income, all those factors combine with even a modest recovery to tend to reduce budget deficits over time.

JAY: Now, where exactly is it coming from, though? My understanding is working-class wages have gone up maybe 1 percent or something and not even keeping up with inflation. And many of the higher-end working-class sectors like auto and some of the places that are more unionized are actually getting into these two-tier contracts now where new workers are making half of what older workers made. So is this essentially this increased tax revenue? Is this more coming from what upper echelons of the salary scale or what?

BLACK: Yes, that’s certainly where the enormous surge is. That’s where the tremendous gains are. And, of course, what you’ve seen is the stock market has gone up and is now, you know, back towards record levels. And that means that there have been tremendous capital gains. You also see that housing appears finally to be recovering a bit, and that’s most middle-class folks’, of course, principal asset. So you spend a little bit more. Even if you’re not making more income, what we’re seeing in the middle class and below is increased debt. So that’s how people are spending more who are less wealthy. And they’re willing to take on more debt because they see unemployment rates coming down, they see the stock market going up, and they see the stabilization of home prices, and they’re saying, well, okay, I can afford to do, you know, some increase of debt at this point, also simply because over the last three and a half years they have been reducing their debt, so they don’t have quite as big a overhang. So all of those things are happening, and you’re getting some stimulus out of the middle class from the recovery.

But the big, big numbers are coming from wealthier folks and, again, the tremendous capital gains that we’ve seen as a result of the recovery of the stock market. And remember, all of this is–mostly it’s a change of direction. So during the Great Recession, all of these things go in the wrong direction, and then even if you get a modest recovery–and of course in capital gains and such it hasn’t been a modest recovery; it’s been an enormous recovery in the incomes of the wealthy–then you get the changeover to increased consumption spending, increased income taxes. You even get some increase in corporate income taxes. They are, after all, not all Apples of the world. And that combination means that a budget deficit will tend to go down as you get the economic recovery.

Now, here’s the kicker, though, with the CBO. The CBO, for good political reasons but bad economic reasons, uses a static analysis of the economy when it makes its projections. So, for example, if you’re increasing taxes and decreasing expenditures while you’re still in a weak recovery from the Great Recession, there’s a significant danger that you’re going to dramatically weaken the recovery or even potentially turn it into a recession. The CBO estimates ignore all of that. And the reason they do is because of the Laffer curve stuff. Right? So Republicans, or at least a subset of Republicans, became enamored of this concept of the Laffer curve that said the more you reduce taxes, you’ve got this massive surge, supposedly, in increased productivity and wealth, and you would actually end up with greater tax revenues, and therefore, of course, a smaller deficit, by cutting taxes.

Now, that was never true, but politically those Republicans always demanded, instead of static estimates by the CBO, what they called dynamic estimates. In other words, the impact which they were assuming from their own theory that said when we decrease taxes we’re actually going to decrease the deficit by just ramping up recovery–not recovery; they weren’t talking about during recession, necessarily, just that any time you cut taxes, they said, the economy will bloom. You know, let 100 flowers bloom. And so the CBO has always resisted that kind of dynamic scoring, as it’s called–scoring is a term for what’s the effect on the budget. And as a result, there are things like the budget hero game that you can look at on the web, and the only way to be a budget hero is to slash, you know, expenditures, because it’s a purely static analysis. No economist believes in a purely static analysis. And so the CBO in these circumstances is certainly correct in that the deficit has come down and come down substantially, but it’s not necessarily correct in saying that we can go and have more austerity, more austerity, and more austerity and have the budget deficit continue to fall. If it kicks us over into dramatically reduced growth or into a second recession, it can do exactly the opposite.

JAY: [incompr.] I mean, two things. One is my understanding is household savings have come down to something like 2 percent, that some of this recovery is being fueled by people eating in their savings. And then the second thing: if the capital gain’s being made out of the markets, it’s all being fueled by this incredibly cheap money, isn’t it, that if you’re rich, you can borrow money at practically nothing these days and then go play with it. And so the whole thing smells a little artificial.

BLACK: Well, not necessarily. It’s true that if you’re not making that much money on your savings, you might as well consume if you’re wealthy, right? And so you may get some of that kind of behavior. You are correct a bit about the savings, but, frankly, Americans didn’t have that much in the way of net savings if you’re talking about the working-class people and lower middle class and such. So, as I said, that’s largely an uptick of debt, asnd that’s not necessarily sustainable. So it’s–the point is you can’t simply do a straight-line estimate or projection out of this, and that’s what CBO tends to do with its very static analysis. So people should keep in–.

JAY: [crosstalk] politics, is this going to change anybody’s mind in Washington that they want to get off the austerity track?

BLACK: Maybe a few people in the absolute marginal middle, but that, of course, is a group of maybe three members of Congress. So probably not much. But remember that CBO, if we went back in time to the end of the Clinton administrations, was predicting that we would have huge growing budgetary surpluses for the rest of our lives. And, again, that’s what comes out of a static analysis where you pretty much straight-line project. What is today? Well, that’s how tomorrow will be, except even more so. So be cautious about the CBO.

And there’s a lot of incoherence. So Rachel Maddow is doing this series of, you know, announcements, commercial-like things to promote her show in which she talks about how the Republicans talk about the Democrats being the party of deficits, but in fact it was the Republicans who built up the great deficits. Okay. Fine. But then you look at her show, and she’s finally gotten the point that austerity is a bad thing and that, you know, having stimulus would be a really good thing. So is she blaming Republicans for stimulus or not? Progressives tend to be really incoherent about budget deficits, because they still make this fundamental mistake, understandable in part.

What do we know? We know our own budgets. And in our own budgets, we can’t run deficits for very long, you know, beyond our school years or some really bad things happen. And so we tend when we think about national governments with sovereign currencies like the United States to simply think, well, whatever makes sense for my household must make sense for a national government as well, even if it has a sovereign currency. And that’s simply not true. And the CBO ignores all of those ramifications.

So I don’t, you know, use the CBO when it’s pointing in my direction, because it’s pointing in my direction for the wrong reason, right? It’s like the old joke about the stopped watch. The CBO will get it correct from time to time, but you shouldn’t as a progressive go, a-ha, see, the CBO agrees with me, because most of the time the CBO will get it wrong, and for the wrong reasons it’ll be very harmful to your position.

JAY: Alright. Thanks for joining us, Bill.

BLACK: Thank you.

JAY: And thank you for joining us on The Real News Network.

End

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