Senator John Kerry, along with the two other Democratic senators appointed to the "Super Committee", had a column in the Wall Street Journal yesterday on their approach to the committee's work. This piece is infuriating for its empty platitudes and the refusal to acknowledge economic reality. In just 700 words the piece promulgated 3 major economic myths while ignoring the fundamental truths about the economy and the budget.
First, the piece told readers about the confidence fairy: businesses are not investing because they lack confidence in the economy and Congress. The data on investment actually show the opposite. Investment in equipment and software is nearly back at its pre-recession level measured as a share of GDP. This is quite impressive since most sectors of the economy have huge amounts of excess capacity. In other words, tales of business uncertainty might be a clever line to repeat at Washington cocktail parties, but the data show it is not an issue.
The second myth is that we now have to be very very worried because Standard and Poor's downgraded our debt, sending the stock market plummeting. First, Standard and Poor's has a disastrous track record in assessing credit quality. It decided to downgrade based on a $2 trillion arithmetic error and didn't change its decision when the mistake was corrected. Like the decision to go to war in Iraq, the downgrade appears to be a policy that was determined independent of the evidence.
The other problem with this story is that Standard and Poor downgraded U.S. bonds, not U.S. stock. If the markets were responding to the downgrade, then we should have expected bond prices plummet. They didn't. The price of Treasury bonds soared to near record highs in the first trading day following the downgrade.
This suggests that the stock market plunge was a response to something else other than the downgrade. It's easy to find this something else. The debt crisis in Europe had spread from small countries to Italy and Spain; countries that would be difficult to bail out. This raised the prospect of a chain of defaults leading to bank insolvencies. This in turn could produce another financial freeze-up like the one in the fall of 2008 following the Lehman bankruptcy.
That would be enough to shake stock markets even if we were looking at huge government budget surpluses for the next millennium and S&P had added a 4th "A" to the U.S. rating, as Warren Buffet has suggested. It's disturbing that these senators would repeat a scare story that they should know to be false.
The third major myth is that the prosperity and the budget surpluses of the late 90s were the result of the "tough choices" that Congress made in cutting the budget and raising taxes. Actually, if the senators go back and look at the Congressional Budget Office's [CBO] 1996 projections, they would see that it still anticipated a deficit of $244 billion or 2.7 percent of GDP for 2000. This was after the Clinton tax increases and the budget cuts had already been put in place. CBO calculated the tax and spending changes Congress put in place over the next four years added $10 billion to the 2000 deficit.
The reason that we actually had a $240 billion surplus (2.4 percent of GDP) in 2000 was that the United States had a stock bubble propelled boom at the end of the decade. This caused the economy to grow much more rapidly than CBO expected with the unemployment rate falling to 4.0 percent in 2000, rather than the 6.0 percent predicted by CBO. Do the senators not remember the stock bubble?
In addition to promoting these false stories about the economy and the budget, the senators fail to tell the true story. The large deficits the country currently faces are not the result of an ongoing pattern of excessive profligacy. They are the result of the economy's plunge following the collapse of the housing bubble. Even with the cost of the wars, the Medicare drug benefit and the Bush tax cuts, the projected deficits were relatively modest prior to the collapse of the housing bubble.
The true story is that our deficit problem is really an economic problem - we let a huge housing bubble grow, which would inevitably collapse and sink the economy. The deficit is needed now to make up for the $1.2 trillion loss in annual demand from the private sector, which had been generated by the housing bubble. The bubble had led to booms to both construction and consumption that have gone bust now that house prices have crashed.
Senator Kerry deserves special blame in this story because he could never be bothered to pay attention to the housing bubble, even when he was running for president in 2004. I recall urging his campaign staffers to pay attention to the bubble. It was like talking to Barney Frank's dining room table.
Of course Robert Rubin was one of Kerry's top economic advisers. Rubin was making tens of millions of dollars at Citigroup whose profits were derived largely from marketing subprime junk loans. So perhaps it is not surprising that Kerry had little interest in learning anything about the housing bubble.
Still it is more than a bit infuriating that Senator Kerry and his colleagues would now be lecturing the country on the need for hard choices. If they could have been bothered to do their damn jobs just a few years ago, we would not be in this situation today. As a result of their failure, tens of millions of workers are unemployed or underemployed. Yet the senators, who are still drawing their paychecks, want the country to sacrifice even more. Maybe now they can be persuaded to learn a little economics.
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It's just like people listening to the podunk tea partiers who came into office thinking they all had PHD's in economics.
It is infuriating. And sometimes I really ashamed to call myself a Democrat.
Some were warning about who to be worried about - and what was coming - all along.
It would be funny if it weren't so tragic ...
Odd that no one was critical of S&P until they said the Democrats are spending and borrowing too much. All of a sudden the Dem attack machine pounces. Clear motives here.
The stock market is worried about all of the financial messes because of the debt and deficit in Europe as well as in the US.
You give Clinton the credit for the surplus in the 90s, but he had no wars and he had the benefit of a GOP senate and house that managed finances well.
And you blame Kerry for the housing bubble instead of Bush. How refreshing. But you have to go back to Carter era for the push for lower credit ratings to "allow more low income Americans to own homes" along with that came the APRs. Then to Clinton who encouraged the mortgage companies to make more loans to minorities, even those with low credit scores. And then came the subprime loans. The those low score homes are defaulted. Duh!
Bush asked Chris Dodd and Barney Frank to look into some of the issue with mortgages in 2008. What happened? Nothing.
I find it ironic that because Kerry, a strong record of liberalism, made statement that we will have hard choices to make, implying cuts, That now puts a target on him by the Democratic attack machine.
We have those office parks and malls here too that were built in the building boom created by a faux market based on all that extravagance funded by home equity and credit card loans. Some were built in 2008 and has no tenants yet.
The government has its share of the same mentality, creating a false sense of wealth with credit causing the debt and deficit.
This whole economic downturn may bring some stability in our society as well as government. At least until the next generation when they forget history.
The Iraq vote itself has generated 2 trillion dollars worth of debt!
Why? Because he is a real patriot. I hear his frustration from time to time but he always tries to support Obama. Really , the Republicans are doing enough to undermine the legitimacy of a duly elected president.
solutions to U.S. economic problems, I'm more than fed up with Democratic members of Congress who only pay lip service to the traditional values of their party.
=There's a cadre of Democrats in the Senate, for example, who are great at making speeches that extoll the middle class and oppose things like extending the "Bush tax cuts for the wealthy." But, their voting records often tell a different story.
=John Kerry is certainly a charter member of this group, as is Jay Rockefeller--who always appears shocked at the unsafe working conditions in the mines in West Virginia, the state he's represented for more than twenty years, when there's yet another underground tragedy.
=The latest member of the Senate "Liar's Club," sadly, is Al Franken. I recall the high hopes I had when Al, once described by Republicans as "a dangerous ultra-liberal," was finally seated in the Senate. "Boy, do progressives have a witty and outspoken representative in the Senate now," I exulted. But, I'm still waiting for that "liberal hero" to show up.
However, before the 2010 election, Senator Kerry was one of about 6 Senators who called for the vote on extending JUST the tax cuts for those making under $250,000 - something he was very much for. Waiting until after the election was a huge mistake as we lost this vote as a defining voting issue and we lost leverage after their big wins.
As to Franken, he ran as, at best, a liberal leaning moderate Democrat. If you expected a MN version of Bernie Sanders, it was your projection - not who he said he was. The Republicans have called most Democrats "dangerous ultra- liberals" - including some like both Clintons, Gore (the first DLC sponsored candidate in 1988.), John Edwards (with a voting record like Bayh's) and people really in the left half such as Kennedy, Kerry, and Durbin.
Elephants never forget and when he ran for office they paid him back in spades by swift-boating him.
Please get informed.