Health Policy Malpractice

September 4, 2006

By: Paul Krugman

Let me tell you about two government-financed health care programs. One, the Veterans Health Administration, is a stunning success — but the administration and Republicans in Congress refuse to build on that success, because it doesn’t fit their conservative agenda. The other, Medicare Advantage, is a clear failure, but it’s expanding rapidly thanks to large subsidies the administration rammed through Congress in 2003.

I’ve written about the V.A. before; it was the subject of a recent informative article in Time. Some still think of the V.A. as a decrepit institution, which it was in the Reagan and Bush I years. But thanks to reforms begun under Bill Clinton, it’s now providing remarkably high-quality health care at remarkably low cost.

The key to the V.A.’s success is its long-term relationship with its clients: veterans, once in the V.A. system, normally stay in it for life.

This means that the V.A. can easily keep track of a patient’s medical history, allowing it to make much better use of information technology than other health care providers. Unlike all but a few doctors in the private sector, V.A. doctors have instant access to patients’ medical records via a systemwide network, which reduces both costs and medical errors.

The long-term relationship with patients also lets the V.A. save money by investing heavily in preventive medicine, an area in which the private sector — which makes money by treating the sick, not by keeping people healthy — has shown little interest.

The result is a system that achieves higher customer satisfaction than the private sector, higher quality of care by a number of measures and lower mortality rates — at much lower cost per patient. Not surprisingly, hundreds of thousands of veterans have switched from private physicians to the V.A. The commander of the American Legion has proposed letting elderly vets spend their Medicare benefits at V.A. facilities, which would lead to better medical care and large government savings.

Instead, the Bush administration has restricted access to the V.A. system, limiting it to poor vets or those with service-related injuries. And as for allowing elderly vets to get better, cheaper health care: “Conservatives,” writes Time, “fear such an arrangement would be a Trojan horse, setting up an even larger national health-care program and taking more business from the private sector.”

Think about that: they won’t let vets on Medicare buy into the V.A. system, not because they believe this policy initiative would fail, but because they’re afraid it would succeed.

Meanwhile, the Bush administration is pursuing a failed idea from the 1990’s: channeling Medicare recipients into private H.M.O.’s. The theory was that H.M.O.’s, by bringing private-sector efficiency and the magic of the marketplace to health care, would be able to do what the V.A. has achieved in practice: provide better care at lower cost.

But the theory was wrong. Years of experience show that H.M.O.’s actually have substantially higher costs per patient than conventional Medicare, because they add an expensive extra layer of bureaucracy and also spend heavily on marketing. H.M.O.’s for Medicare recipients prospered for a while by selectively covering relatively healthy older Americans, but when the government began paying less for those likely to have low medical costs, many H.M.O.’s dropped out of the Medicare market.

In 2003, however, the Bush administration pushed through the Medicare Advantage program, which offers heavy subsidies to H.M.O.’s. According to the independent Medicare Payment Advisory Commission, Medicare Advantage plans cost the government 11 percent more per person than traditional Medicare. Oh, and mortality rates in these plans are 40 percent higher than those of elderly veterans covered by the V.A. But thanks to the subsidy, membership in Medicare Advantage plans is surging.

On one side, then, the administration and its allies in Congress oppose expanding the best health care system in America, even though that expansion would save taxpayer dollars, because they’re afraid that allowing a successful government program to expand would undermine their antigovernment crusade and displease powerful business lobbies.

On the other side, ideology and fealty to interest groups make them willing to waste billions subsidizing private H.M.O.’s.

Remember that contrast the next time you hear some conservative going on about excessive spending on entitlements, and declaring that we need to cut back on Medicare and Medicaid benefits.

Broken Promises

August  28, 2006
By: Paul Krugman

Last September President Bush stood in New Orleans, where the lights had just come on for the first time since Katrina struck, and promised “one of the largest reconstruction efforts the world has ever seen.” Then he left, and the lights went out again.

What happened next was a replay of what happened after Mr. Bush asked Congress to allocate $18 billion for Iraqi reconstruction. In the months that followed, congressmen who visited Iraq returned with glowing accounts of all the wonderful things we were doing there, like repainting schools and, um, repainting schools.

But when the Coalition Provisional Authority, which was running Iraq, closed up shop nine months later, it turned out that only 2 percent of the $18 billion had been spent, and only a handful of the projects that were supposed to have been financed with that money had even been started. In the end, America failed to deliver even the most basic repair of Iraq’s infrastructure; today, Baghdad gets less than seven hours of electricity a day.

And so it is along our own Gulf Coast. The Bush administration likes to talk about all the money it has allocated to the region, and it plans a public relations blitz to persuade America that it’s doing a heck of a job aiding Katrina’s victims. But as the Iraqis learned, allocating money and actually using it for reconstruction are two different things, and so far the administration has done almost nothing to make good on last year’s promises.

It’s true that tens of billions have been spent on emergency relief and cleanup. But even the cleanup remains incomplete: almost a third of the hurricane debris in New Orleans has yet to be removed. And the process of going beyond cleanup to actual reconstruction has barely begun.

For example, although Congress allocated $17 billion to the Department of Housing and Urban Development for Katrina relief, primarily to provide cash assistance to homeowners, as of last week the department had spent only $100 million. The first Louisiana homeowners finally received checks under a federally financed program just three days ago. Mississippi, which has a similar program, has sent out only about two dozen checks so far.

Local governments, which were promised aid in rebuilding facilities such as fire stations and sewer systems, have fared little better in actually getting that aid. A recent article in The National Journal describes a Kafkaesque situation in which devastated towns and parishes seeking federal funds have been told to jump through complex hoops, spending time and money they don’t have on things like proving that felled trees were actually knocked down by Katrina, only to face demands for even more paperwork.

Apologists for the administration will doubtless claim that blame for the lack of progress rests not with Mr. Bush, but with the inherent inefficiency of government bureaucracies. That’s the great thing about being an antigovernment conservative: even when you fail at the task of governing, you can claim vindication for your ideology.

But bureaucracies don’t have to be this inefficient. The failure to get moving on reconstruction reflects lack of leadership at the top.

Mr. Bush could have moved quickly to turn his promises of reconstruction into reality. But he didn’t. As months dragged by with little sign of White House action, all urgency about developing a plan for reconstruction ebbed away.

Mr. Bush could have appointed someone visible and energetic to oversee the Gulf Coast’s recovery, someone who could act as an advocate for families and local governments in need of help. But he didn’t. How many people can even name the supposed reconstruction “czar”?

Mr. Bush could have tried to fix FEMA, the agency whose effectiveness he destroyed through cronyism and privatization. But he didn’t. FEMA remains a demoralized organization, unable to replenish its ranks: it currently has fewer than 84 percent of its authorized personnel.

Maybe the aid promised to the gulf region will actually arrive some day. But by then it will probably be too late. Many former residents and small-business owners, tired of waiting for help that never comes, will have permanently relocated elsewhere; those businesses that stayed open, or reopened after the storm, will have gone under for lack of customers. In America as in Iraq, reconstruction delayed is reconstruction denied — and Mr. Bush has, once again, broken a promise.

Housing Gets Ugly

August 25, 2006
By: Paul Krugman

Bubble, bubble, Toll’s in trouble. This week, Toll Brothers, the nation’s premier builder of McMansions, announced that sales were way off, profits were down, and the company was walking away from already-purchased options on land for future development.

Toll’s announcement was one of many indications that the long-feared housing bust has arrived. Home sales are down sharply; home prices, which rose 57 percent over the past five years (and much more than that along the coasts), are now falling in much of the country. The inventory of unsold existing homes is at a 13-year high; builders’ confidence is at a 15-year low.

A year ago, Robert Toll, who runs Toll Brothers, was euphoric about the housing boom, declaring: “We’ve got the supply, and the market has got the demand. So it’s a match made in heaven.” In a New York Times profile of his company published last October, he dismissed worries about a possible bust. “Why can’t real estate just have a boom like every other industry?” he asked. “Why do we have to have a bubble and then a pop?”

The current downturn, Mr. Toll now says, is unlike anything he’s seen: sales are slumping despite the absence of any “macroeconomic nasty condition” taking housing down along with the rest of the economy. He suggests that unease about the direction of the country and the war in Iraq is undermining confidence. All I have to say is: pop!

Now what? Until recently most business economists were predicting a “soft landing” for housing. Even now, the majority opinion seems to be that we’re looking at a cooling market, not a bust. But this complacency looks increasingly like denial, as hard data — which tend, for technical reasons, to lag what’s actually going on in the market — start to confirm anecdotal evidence that it is, indeed, a bust.

Why the sudden crackup? When prices were rising rapidly, some people bought houses purely as investments, betting that prices would keep going up. Other people rushed to buy houses, or stretched themselves to buy houses they couldn’t really afford, because they feared that prices would rise out of reach if they waited. And all this speculative demand pushed prices even higher. In other words, there was a market bubble.

But eventually prices reached a level beyond what even optimistic potential buyers were willing to pay, especially after interest rates rose a bit. (They’re still low by historical standards.) As demand fell short of supply, double-digit price increases declined into the low single digits, then went negative everywhere except in the South.

And with prices falling in many areas, the speculative demand for houses has gone into reverse, as people try to get out with a profit while they still can. There’s now a rapidly growing glut of unsold houses. This is a recipe for a major bust, not a soft landing.

Moreover, it could be both a deep and a prolonged bust. Since 2000, much of the nation has experienced a rise in home prices comparable to the boom in Southern California during the late 1980’s. After that bubble popped, Los Angeles house prices began a slow, grinding deflation, eventually falling 20 percent (34 percent after adjusting for inflation). Prices didn’t begin a sustained recovery until 1996, more than six years after the downturn began.

Now imagine the same thing happening across a large part of the United States. It’s an ugly picture, and not just for people and companies in the construction business. Many homeowners — especially those who bought their houses with interest-only loans or with minimal down payments — will find themselves in financial distress. And the economy as a whole will take a hit.

As far as I know, Nouriel Roubini of Roubini Global Economics is the only well-known economist flatly predicting a housing-led recession in the coming year. Most forecasters consider his call alarmist, and many Federal Reserve officials remain optimistic. Last week, Richard Fisher, the president of the Federal Reserve Bank of Dallas, dismissed “Eeyores in the analytical community” who worry about a possible recession.

Call me Eeyore. While I don’t share Mr. Roubini’s certainty, I see his point: housing has been the main engine of U.S. economic growth over the past three years, and with that engine now going into reverse, it’s hard to see how we can avoid a serious slowdown.

Tax Farmers, Mercenaries and Viceroys

August 21, 2006

 

By: Paul Krugman

Yesterday The New York Times reported that the Internal Revenue Service would outsource collection of unpaid back taxes to private debt collectors, who would receive a share of the proceeds.

It’s an awful idea. Privatizing tax collection will cost far more than hiring additional I.R.S. agents, raise less revenue and pose obvious risks of abuse. But what’s really amazing is the extent to which this plan is a retreat from modern principles of government. I used to say that conservatives want to take us back to the 1920’s, but the Bush administration seemingly wants to go back to the 16th century.

And privatized tax collection is only part of the great march backward.

In the bad old days, government was a haphazard affair. There was no bureaucracy to collect taxes, so the king subcontracted the job to private “tax farmers,” who often engaged in extortion. There was no regular army, so the king hired mercenaries, who tended to wander off and pillage the nearest village. There was no regular system of administration, so the king assigned the task to favored courtiers, who tended to be corrupt, incompetent or both.

Modern governments solved these problems by creating a professional revenue department to collect taxes, a professional officer corps to enforce military discipline, and a professional civil service. But President Bush apparently doesn’t like these innovations, preferring to govern as if he were King Louis XII.

So the tax farmers are coming back, and the mercenaries already have. There are about 20,000 armed “security contractors” in Iraq, and they have been assigned critical tasks, from guarding top officials to training the Iraqi Army.

Like the mercenaries of old, today’s corporate mercenaries have discipline problems. “They shoot people, and someone else has to deal with the aftermath,” declared a U.S. officer last year.

And armed men operating outside the military chain of command have caused at least one catastrophe. Remember the four Americans hung from a bridge? They were security contractors from Blackwater USA who blundered into Falluja — bypassing a Marine checkpoint — while the Marines were trying to pursue a methodical strategy of pacifying the city. The killing of the four, and the knee-jerk reaction of the White House — which ordered an all-out assault, then called it off as casualties mounted — may have ended the last chance of containing the insurgency.

Yet Blackwater, whose chief executive is a major contributor to the Republican Party, continues to thrive. The Department of Homeland Security sent heavily armed Blackwater employees into New Orleans immediately after Katrina.

To whom are such contractors accountable? Last week a judge threw out a jury’s $10 million verdict against Custer Battles, a private contractor that was hired, among other things, to provide security at Baghdad’s airport. Custer Battles has become a symbol of the mix of cronyism, corruption and sheer amateurishness that doomed the Iraq adventure — and the judge didn’t challenge the jury’s finding that the company engaged in blatant fraud.

But he ruled that the civil fraud suit against the company lacked a legal basis, because as far as he could tell, the Coalition Provisional Authority, which ran Iraq’s government from April 2003 to June 2004, wasn’t “an instrumentality of the U.S. government.” It wasn’t created by an act of Congress; it wasn’t a branch of the State Department or any other established agency.

So what was it? Any premodern monarch would have recognized the arrangement: in effect, the authority was a personal fief run by a viceroy answering only to the ruler. And since the fief operated outside all the usual rules of government, the viceroy was free to hire a staff of political loyalists lacking any relevant qualifications for their jobs, and to hand out duffel bags filled with $100 bills to contractors with the right connections.

Tax farmers, mercenaries and viceroys: why does the Bush administration want to run a modern superpower as if it were a 16th-century monarchy? Maybe people who’ve spent their political careers denouncing government as the root of all evil can’t grasp the idea of governing well. Or maybe it’s cynical politics: privatization provides both an opportunity to evade accountability and a vast source of patronage.

But the price is enormous. This administration has thrown away centuries of lessons about how to make government work. No wonder it has failed at everything except fearmongering.

Wages, Wealth and Politics

August 18, 2006

 

By: Paul Krugman

Recently, Henry Paulson, the Treasury secretary, acknowledged that economic inequality is rising in America. In a break with previous administration pronouncements, he also conceded that this might be cause for concern.

But he quickly reverted to form, falsely implying that rising inequality is mainly a story about rising wages for the highly educated. And he argued that nothing can be done about this trend, that “it is simply an economic reality, and it is neither fair nor useful to blame any political party.”

History suggests otherwise.

I’ve been studying the long-term history of inequality in the United States. And it’s hard to avoid the sense that it matters a lot which political party, or more accurately, which political ideology rules Washington.

Since the 1920’s there have been four eras of American inequality:

• The Great Compression, 1929-1947: The birth of middle-class America. The real wages of production workers in manufacturing rose 67 percent, while the real income of the richest 1 percent of Americans actually fell 17 percent.

• The Postwar Boom, 1947-1973: An era of widely shared growth. Real wages rose 81 percent, and the income of the richest 1 percent rose 38 percent.

• Stagflation, 1973-1980: Everyone lost ground. Real wages fell 3 percent, and the income of the richest 1 percent fell 4 percent.

• The New Gilded Age, 1980-?: Big gains at the very top, stagnation below. Between 1980 and 2004, real wages in manufacturing fell 1 percent, while the real income of the richest 1 percent — people with incomes of more than $277,000 in 2004 — rose 135 percent.

What’s noticeable is that except during stagflation, when virtually all Americans were hurt by a tenfold increase in oil prices, what happened in each era was what the dominant political tendency of that era wanted to happen.

Franklin Roosevelt favored the interests of workers while declaring of plutocrats who considered him a class traitor, “I welcome their hatred.” Sure enough, under the New Deal wages surged while the rich lost ground.

What followed was an era of bipartisanship and political moderation; Dwight Eisenhower said of those who wanted to roll back the New Deal, “Their number is negligible, and they are stupid.” Sure enough, it was also an era of equable growth.

Finally, since 1980 the U.S. political scene has been dominated by a conservative movement firmly committed to the view that what’s good for the rich is good for America. Sure enough, the rich have seen their incomes soar, while working Americans have seen few if any gains.

By the way: Yes, Bill Clinton was president for eight years. But for six of those years Congress was controlled by hard-line right-wingers. Moreover, in practice Mr. Clinton governed well to the right of both Eisenhower and Nixon.

Now, this chronology doesn’t prove that politics drives changes in inequality. There were certainly other factors at work, including technological change, globalization and immigration, an issue that cuts across party lines.

But it seems likely that government policies have played a big role in America’s growing economic polarization — not just easily measured policies like tax rates for the rich and the level of the minimum wage, but things like the shift in Labor Department policy from protection of worker rights to tacit support for union-busting.

And if that’s true, it matters a lot which party is in power — and more important, which ideology. For the last few decades, even Democrats have been afraid to make an issue out of inequality, fearing that they would be accused of practicing class warfare and lose the support of wealthy campaign contributors.

That may be changing. Inequality seems to be an issue whose time has finally come, and if the growing movement to pressure Wal-Mart to treat its workers better is any indication, economic populism is making a comeback. It’s still unclear when the Democrats might regain power, or what economic policies they’ll pursue when they do. But if and when we get a government that tries to do something about rising inequality, rather than responding with a mixture of denial and fatalism, we may find that Mr. Paulson’s “economic reality” is a lot easier to change than he supposes.

Hoping for Fear

August 14, 2006

By: Paul Krugman

Just two days after 9/11, I learned from Congressional staffers that Republicans on Capitol Hill were already exploiting the atrocity, trying to use it to push through tax cuts for corporations and the wealthy. I wrote about the subject the next day, warning that “politicians who wrap themselves in the flag while relentlessly pursuing their usual partisan agenda are not true patriots.”

The response from readers was furious — fury not at the politicians but at me, for suggesting that such an outrage was even possible. “How can I say that to my young son?” demanded one angry correspondent.

I wonder what he says to his son these days.

We now know that from the very beginning, the Bush administration and its allies in Congress saw the terrorist threat not as a problem to be solved, but as a political opportunity to be exploited. The story of the latest terror plot makes the administration’s fecklessness and cynicism on terrorism clearer than ever.

Fecklessness: the administration has always pinched pennies when it comes to actually defending America against terrorist attacks. Now we learn that terrorism experts have known about the threat of liquid explosives for years, but that the Bush administration did nothing about that threat until now, and tried to divert funds from programs that might have helped protect us. “As the British terror plot was unfolding,” reports The Associated Press, “the Bush administration quietly tried to take away $6 million that was supposed to be spent this year developing new explosives detection technology.”

Cynicism: Republicans have consistently portrayed their opponents as weak on terrorism, if not actually in sympathy with the terrorists. Remember the 2002 TV ad in which Senator Max Cleland of Georgia was pictured with Osama bin Laden and Saddam Hussein? Now we have Dick Cheney suggesting that voters in the Democratic primary in Connecticut were lending aid and comfort to “Al Qaeda types.” There they go again.

More fecklessness, and maybe more cynicism, too: NBC reports that there was a dispute between the British and the Americans over when to make arrests in the latest plot. Since the alleged plotters weren’t ready to go — they hadn’t purchased airline tickets, and some didn’t even have passports yet — British officials wanted to watch and wait, hoping to gather more evidence. But according to NBC, the Americans insisted on early arrests.

Suspicions that the Bush administration might have had political motives in wanting the arrests made prematurely are fed by memories of events two years ago: the Department of Homeland Security declared a terror alert just after the Democratic National Convention, shifting the spotlight away from John Kerry — and, according to Pakistani intelligence officials, blowing the cover of a mole inside Al Qaeda.

But whether or not there was something fishy about the timing of the latest terror announcement, there’s the question of whether the administration’s scare tactics will work. If current polls are any indication, Republicans are on the verge of losing control of at least one house of Congress. And “on every issue other than terrorism and homeland security,” says Newsweek about its latest poll, “the Dems win.” Can a last-minute effort to make a big splash on terror stave off electoral disaster?

Many political analysts think it will. But even on terrorism, and even after the latest news, polls give Republicans at best a slight advantage. And Democrats are finally doing what they should have done long ago: calling foul on the administration’s attempt to take partisan advantage of the terrorist threat.

It was significant both that President Bush felt obliged to defend himself against that accusation in his Saturday radio address, and that his standard defense — attacking a straw man by declaring that “there should be no disagreement about the dangers we face” — came off sounding so weak.

Above all, many Americans now understand the extent to which Mr. Bush abused the trust the nation placed in him after 9/11. Americans no longer believe that he is someone who will keep them safe, as many did even in 2004; the pathetic response to Hurricane Katrina and the disaster in Iraq have seen to that.

All Mr. Bush and his party can do at this point is demonize their opposition. And my guess is that the public won’t go for it, that Americans are fed up with leadership that has nothing to hope for but fear itself.

Nonsense and Sensibility

August 11, 2006

By: Paul Krugman

After Ned Lamont’s victory in Connecticut, I saw a number of commentaries describing Joe Lieberman not just as a “centrist” — a word that has come to mean “someone who makes excuses for the Bush administration” — but as “sensible.” But on what planet would Mr. Lieberman be considered sensible?

Take a look at Thomas Ricks’s “Fiasco,” the best account yet of how the U.S. occupation of Iraq was mismanaged. The prime villain in that book is Donald Rumsfeld, whose delusional thinking and penchant for power games undermined whatever chances for success the United States might have had. Then read Mr. Lieberman’s May 2004 op-ed article in The Wall Street Journal, “Let Us Have Faith,” in which he urged Mr. Rumsfeld not to resign over the Abu Ghraib scandal, because his removal “would delight foreign and domestic opponents of America’s presence in Iraq.”

And that’s just one example of Mr. Lieberman’s bad judgment. He has been wrong at every step of the march into the Iraq quagmire — all the while accusing anyone who disagreed with him of endangering national security. Again, on what planet would Mr. Lieberman be considered “sensible”? But I know the answer: on Planet Beltway.

Many of those lamenting Mr. Lieberman’s defeat claim that they fear a takeover of our political parties by extremists. But if political polarization were really their main concern, they’d be as exercised about the primary challenge from the right facing Lincoln Chafee as they are about Mr. Lieberman’s woes. In fact, however, the sound of national commentary on the Rhode Island race is that of crickets chirping.

So what’s really behind claims that Mr. Lieberman is sensible — and that those who voted against him aren’t? It’s the fact that many Washington insiders suffer from the same character flaw that caused Mr. Lieberman to lose Tuesday’s primary: an inability to admit mistakes.

Imagine yourself as a politician or pundit who was gung-ho about invading Iraq, and who ridiculed those who warned that the case for war was weak and that the invasion’s aftermath could easily turn ugly. Worse yet, imagine yourself as someone who remained in denial long after it all went wrong, disparaging critics as defeatists. Now denial is no longer an option; the neocon fantasy has turned into a nightmare of fire and blood. What do you do?

You could admit your error and move on — and some have. But all too many Iraq hawks have chosen, instead, to cover their tracks by trashing the war’s critics.

They say: Pay no attention to the fact that I was wrong and the critics have been completely vindicated by events — I’m “sensible,” while those people are crazy extremists. And besides, criticizing any aspect of the war encourages the terrorists.

That’s what Joe Lieberman said, and it’s what his defenders are saying now.

Now, it takes a really vivid imagination to see Mr. Lieberman’s rejection as the work of extremists. I know that some commentators believe that anyone who thinks the Iraq war was a mistake is a flag-burning hippie who hates America. But if that’s true, about 60 percent of Americans hate America. The reality is that Ned Lamont and those who voted for him are, as The New York Times editorial page put it, “irate moderates,” whose views are in accord with those of most Americans and the vast majority of Democrats.

But in his non-concession speech, Mr. Lieberman described Mr. Lamont as representative of a political tendency in which “every disagreement is considered disloyal” — a statement of remarkable chutzpah from someone who famously warned Democrats that “we undermine the president’s credibility at our nation’s peril.”

The question now is how deep into the gutter Mr. Lieberman’s ego will drag him.

There’s an overwhelming consensus among national security experts that the war in Iraq has undermined, not strengthened, the fight against terrorism. Yet yesterday Mr. Lieberman, sounding just like Dick Cheney — and acting as a propaganda tool for Republicans trying to Swift-boat the party of which he still claims to be a member — suggested that the changes in Iraq policy that Mr. Lamont wants would be “taken as a tremendous victory by the same people who wanted to blow up these planes in this plot hatched in England.”

In other words, not only isn’t Mr. Lieberman sensible, he may be beyond redemption.

Intimations of Recession

August 7, 2006

 

By: Paul Krugman

These are the dog days of summer, but there’s a chill in the air. Suddenly — really just in the last few weeks — people have starting talking seriously about a possible recession. And it’s not just economists who seem worried. Goldman Sachs recently reported that the confidence of chief executives at major corporations has plunged; a clear majority of C.E.O.’s now say that conditions in the world economy, and the U.S. economy in particular, are worsening rather than improving.

On the face of it, this loss of faith seems strange. Recent growth and jobs numbers have been disappointing, but not disastrous.

But economic numbers don’t speak for themselves. They always have to be interpreted as part of a story. And the latest numbers, while not that bad taken out of context, seem inconsistent with the stories optimists were telling about the U.S. economy.

The key point is that the forces that caused a recession five years ago never went away. Business spending hasn’t really recovered from the slump it went into after the technology bubble burst: nonresidential investment as a share of G.D.P., though up a bit from its low point, is still far below its levels in the late 1990’s. Also, the trade deficit has doubled since 2000, diverting a lot of demand away from goods produced in the United States.

Nonetheless, the economy grew fairly fast over the last three years, mainly thanks to a gigantic housing boom. This boom led directly to unprecedented spending on home construction. It also allowed consumers to convert rising home values into cash through mortgage refinancing, so that consumer spending could run far ahead of families’ incomes. (Americans have been spending more than they earn for the past year and a half.)

Even optimists generally concede that the housing boom must eventually end, and that consumers will eventually have to start saving again. But the conventional wisdom was that housing would have a “soft landing” — that the boom would taper off gradually, and that other sources of growth would take its place. You might say that the theory was that business investment and exports would stand up as housing stood down.

The latest numbers suggest, however, that this theory isn’t working much better on the economic front than it is in Baghdad.

Signs of a deflating housing bubble began appearing a year ago, but for a while it was possible to argue that eliminating a bit of “froth” in the housing market wouldn’t do the overall economy much harm. Now, for the first time, problems in the housing market are starting to seriously reduce economic growth: the latest G.D.P. data show real residential investment falling at an accelerating pace. The latest job numbers show falling employment in home construction, and retail employment has fallen over the past year, suggesting that consumer spending is running out of steam. (Gas at $3 a gallon doesn’t help, either.)

Meanwhile, neither business investment nor exports seem to be growing fast enough to make up for the housing slump.

Now maybe we’ll still manage that soft landing despite a rapidly rising number of unsold houses; or maybe there’s a boom in business investment and/or exports just over the horizon. But based on what we know now, there’s an economic slowdown coming.

This slowdown might not be sharp enough to be formally declared a recession. But weak growth feels like a recession to most people; remember the long “jobless recovery” that followed the official end of the 2001 recession?

And what will policy makers do about a slump, if it happens? A snarky but accurate description of monetary policy over the past five years is that the Federal Reserve successfully replaced the technology bubble with a housing bubble. But where will the Fed find another bubble?

And with the budget still deep in deficit and the costs of the Iraq war still spiraling upward, it’s hard to see Congress agreeing on any significant fiscal stimulus package — especially because history suggests that the Bush administration and Congressional leaders will turn any debate about how to help the economy into yet another attempt to smuggle in tax cuts for the wealthy.

One last thing: the real wages of most workers fell during the “Bush boom” of the last three years. If that boom, such as it was, is already over, workers have every right to ask, “Is that it?”

Centrism is for Suckers

August 4, 2006

 

By: Paul Krugman

If you want to understand the state of America today, a good place to start is with the contrast between the political strategies of conservative business advocacy groups like the U.S. Chamber of Commerce and those of more or less liberal advocacy groups like the Sierra Club.

The chamber recently got into trouble because of ads it ran praising Republican members of Congress who, it said, voted for the Medicare prescription drug program. It turned out that one of the congressmen praised in the ads actually voted against the program, while two others weren’t even in Congress when the vote took place.

Oops. But the bigger question is, aren’t business groups supposed to favor fiscal responsibility and reducing the size of government? So why is the chamber praising a program that substantially increases the size of government and has no visible means of financial support?

The answer is obvious: the Bush administration hopes to win some votes in the midterm elections from older Americans now receiving drug benefits, and the chamber, like many conservative organizations these days, believes that its interests are best served by helping Republicans win elections. If the administration and its allies in Congress want the chamber’s support on an issue, they get it, never mind the details.

If you want an even starker example, consider the fact that the National Federation of Independent Business, the small-business lobby, is supporting the bizarre, hybrid wage-and-tax legislation now before the Senate. This legislation would raise the minimum wage while sharply cutting taxes on very large estates.

From a small-business owner’s point of view, this deal makes no sense. Many owners of small businesses believe, rightly or wrongly, that they would be hurt by a rise in the minimum wage. Meanwhile, very few are rich enough to pay estate taxes: the Congressional Budget Office reports that if current law had applied in 2000, only 135 small business estates would have paid any tax at all, which means that small-business owners subject to the estate tax are substantially harder to find than people who have been struck by lightning.

It’s possible that the federation’s leadership has been misled by Heritage Foundation propaganda. But it’s more likely that, like the chamber, the federation believes that its interests are best served by acting as a loyal servant of the Republican electoral effort. And both organizations are probably right.

Now compare this with the behavior of advocacy groups like the Sierra Club, the environmental organization, and Naral, the abortion-rights group, both of which have endorsed Senator Lincoln Chafee, Republican of Rhode Island, for re-election. The Sierra Club’s executive director defended the Chafee endorsement by saying, “We choose people, not parties.” And it’s true that Mr. Chafee has usually voted with environmental groups.

But while this principle might once have made sense, it’s just naïve today. Given both the radicalism of the majority party’s leadership and the ruthlessness with which it exercises its control of the Senate, Mr. Chafee’s personal environmentalism is nearly irrelevant when it comes to actual policy outcomes; the only thing that really matters for the issues the Sierra Club cares about is the “R” after his name.

Put it this way: If the Democrats gain only five rather than six Senate seats this November, Senator James Inhofe, who says that global warming is “the greatest hoax ever perpetrated on the American people,” will remain in his current position as chairman of the Senate Environment and Public Works Committee. And if that happens, the Sierra Club may well bear some of the responsibility.

The point is that those who cling to the belief that politics can be conducted in terms of people rather than parties — a group that also includes would-be centrist Democrats like Joe Lieberman and many members of the punditocracy — are kidding themselves.

The fact is that in 1994, the year when radical Republicans took control both of Congress and of their own party, things fell apart, and the center did not hold. Now we’re living in an age of one-letter politics, in which a politician’s partisan affiliation is almost always far more important than his or her personal beliefs. And those who refuse to recognize this reality end up being useful idiots for those, like President Bush, who have been consistently ruthless in their partisanship.

Shock and Awe

July 31, 2006

 

By: Paul Krugman

 

For Americans who care deeply about Israel, one of the truly nightmarish things about the war in Lebanon has been watching Israel repeat the same mistakes the United States made in Iraq. It’s as if Prime Minister Ehud Olmert has been possessed by the deranged spirit of Donald Rumsfeld.

Yes, I know that there are big differences in the origins of the two wars. There’s no question of this war having been sold on false pretenses; unlike America in Iraq, Israel is clearly acting in self-defense.

But both Clausewitz and Sherman were right: war is both a continuation of policy by other means, and all hell. It’s a terrible mistake to start a major military operation, regardless of the moral justification, unless you have very good reason to believe that the action will improve matters.

The most compelling argument against an invasion of Iraq wasn’t the suspicion many of us had, which turned out to be correct, that the administration’s case for war was fraudulent. It was the fact that the real reason government officials and many pundits wanted a war — their belief that if the United States used its military might to “hit someone” in the Arab world, never mind exactly who, it would shock and awe Islamic radicals into giving up terrorism — was, all too obviously, a childish fantasy.

And the results of going to war on the basis of that fantasy were predictably disastrous: the fiasco in Iraq has ended up demonstrating the limits of U.S. power, strengthening radical Islam — especially radical Shiites allied with Iran, a group that includes Hezbollah — and losing America the moral high ground.

What I never expected was that Israel — a nation that has unfortunately had plenty of experience with both war and insurgency — would be susceptible to similar fantasies. Yet that’s what seems to have happened.

There is a case for a full-scale Israeli ground offensive against Hezbollah. It may yet come to that, if Israel can’t find any other way to protect itself. There is also a case for restraint — limited counterstrikes combined with diplomacy, an effort to get other players to rein Hezbollah in, with the option of that full-scale offensive always in the background.

But the actual course Israel has chosen — a bombing campaign that clearly isn’t crippling Hezbollah, but is destroying Lebanon’s infrastructure and killing lots of civilians — achieves the worst of both worlds. Presumably there were people in the Israeli government who assured the political leadership that a rain of smart bombs would smash and/or intimidate Hezbollah into submission. Those people should be fired.

Israel’s decision to rely on shock and awe rather than either diplomacy or boots on the ground, like the U.S. decision to order the U.N. inspectors out and invade Iraq without sufficient troops or a plan to stabilize the country, is having the opposite of its intended effect. Hezbollah has acquired heroic status, while Israel has both damaged its reputation as a regional superpower and made itself a villain in the eyes of the world.

Complaining that this is unfair does no good, just as repeating “but Saddam was evil” does nothing to improve the situation in Iraq. What Israel needs now is a way out of the quagmire. And since Israel doesn’t appear ready to reoccupy southern Lebanon, that means doing what it should have done from the beginning: try restraint and diplomacy. And Israel will negotiate from a far weaker position than seemed possible just three weeks ago.

And what about the role of the United States, which should be trying to contain the crisis? Our response has been both hapless and malign.

For the moment, U.S. policy seems to be to stall and divert efforts to negotiate a cease-fire as long as possible, so as to give Israel a chance to dig its hole even deeper. Also, we aren’t talking to Syria, which might hold the key to resolving the crisis, because President Bush doesn’t believe in talking to bad people, and anyway that’s the kind of thing Bill Clinton did. Did I mention that these people are childish?

Again, Israel has the right to protect itself. If all-out war with Hezbollah becomes impossible to avoid, so be it. But bombing Lebanon isn’t making Israel more secure.

As this column was going to press, Israel — responding to the horror at Qana, where missiles killed dozens of civilians, many of them children — announced a 48-hour suspension of aerial bombardment. But why resume that bombardment when the 48 hours are up? The hard truth is that Israel needs, for its own sake, to stop a bombing campaign that is making its enemies stronger, not weaker.