Archive for June, 2006

Class War Politics

June 20, 2006

June 19, 2006
By: Paul Krugman

In case you haven't noticed, modern American politics is marked by vicious partisanship, with the great bulk of the viciousness coming from the right. It's clear that the Republican plan for the 2006 election is, once again, to question Democrats' patriotism.

But do Republican leaders truly believe that they are serious about fighting terrorism, while Democrats aren't? When the speaker of the House declares that "we in this Congress must show the same steely resolve as those men and women on United Flight 93," is that really the way he sees himself? (Dennis Hastert, Man of Steel!) Of course not.

So what's our bitter partisan divide really about? In two words: class warfare. That's the lesson of an important new book, "Polarized America: The Dance of Ideology and Unequal Riches," by Nolan McCarty of Princeton University, Keith Poole of the University of California, San Diego, and Howard Rosenthal of New York University.

"Polarized America" is a technical book written for political scientists. But it's essential reading for anyone who wants to understand what's happening to America.

What the book shows, using a sophisticated analysis of Congressional votes and other data, is that for the past century, political polarization and economic inequality have moved hand in hand. Politics during the Gilded Age, an era of huge income gaps, was a nasty business — as nasty as it is today. The era of bipartisanship, which lasted for roughly a generation after World War II, corresponded to the high tide of America's middle class. That high tide began receding in the late 1970's, as middle-class incomes grew slowly at best while incomes at the top soared; and as income gaps widened, a deep partisan divide re-emerged.

Both the decline of partisanship after World War II and its return in recent decades mainly reflected the changing position of the Republican Party on economic issues.

Before the 1940's, the Republican Party relied financially on the support of a wealthy elite, and most Republican politicians firmly defended that elite's privileges. But the rich became a lot poorer during and after World War II, while the middle class prospered. And many Republicans accommodated themselves to the new situation, accepting the legitimacy and desirability of institutions that helped limit economic inequality, such as a strongly progressive tax system. (The top rate during the Eisenhower years was 91 percent.)

When the elite once again pulled away from the middle class, however, Republicans turned their back on the legacy of Dwight Eisenhower and returned to a focus on the interests of the wealthy. Tax cuts at the top — including repeal of the estate tax — became the party's highest priority.

But if the real source of today's bitter partisanship is a Republican move to the right on economic issues, why have the last three elections been dominated by talk of terrorism, with a bit of religion on the side? Because a party whose economic policies favor a narrow elite needs to focus the public's attention elsewhere. And there's no better way to do that than accusing the other party of being unpatriotic and godless.

Thus in 2004, President Bush basically ran as America's defender against gay married terrorists. He waited until after the election to reveal that what he really wanted to do was privatize Social Security.

Pre-New Deal G.O.P. operatives followed the same strategy. Republican politicians won elections by "waving the bloody shirt" — invoking the memory of the Civil War — long after the G.O.P. had ceased to be the party of Lincoln and become the party of robber barons instead. Al Smith, the 1928 Democratic presidential candidate, was defeated in part by a smear campaign — burning crosses and all — that exploited the heartland's prejudice against Catholics.

So what should we do about all this? I won't offer the Democrats advice right now, except to say that tough talk on national security and affirmations of personal faith won't help: the other side will smear you anyway.

But I would like to offer some advice to my fellow pundits: face reality. There are some commentators who long for the bipartisan days of yore, and flock eagerly to any politician who looks "centrist." But there isn't any center in modern American politics. And the center won't return until we have a new New Deal, and rebuild our middle class.

The Phantom Menace

June 16, 2006

June 16, 2006 

By: Paul Krugman  

Over the last few weeks monetary officials have sounded increasingly worried about rising prices. On Wednesday, Richard Fisher, the president of the Federal Reserve Bank of Dallas, declared that inflation "is running at a rate that is just too corrosive to be accepted by a virtuous central banker."

I'm worried too — but not about recent price increases. What worries me, instead, is the Fed's overreaction to those increases. When it comes to inflation, the main thing we have to fear is fear itself.

Discussions of inflation can be numbingly arcane — are you a core C.P.I. type or a trimmed-mean P.C.E. person? But the real issue is whether there's a serious risk that inflation will become embedded in the economy.

The classic example of embedded inflation is the wage-price spiral — better described as wage-price leapfrogging — of the 1970's. Back then, whenever wage contracts came up for renewal, workers demanded big raises, both to catch up with past inflation and to offset expected future inflation. And whenever companies changed their prices, they raised them by a lot, both to catch up with past wage increases and to offset expected future increases.

The result of this leapfrogging process was that inflation became a self-sustaining process, feeding on itself. And ending that self-sustaining process proved very difficult. The Fed eventually brought the inflation of the 1970's under control, but only by raising interest rates so high that in the early 1980's the U.S. economy suffered its worst slump since the Great Depression.

Fed officials now seem worried that we may be seeing the start of another round of self-sustaining inflation. But is that a realistic fear? Only if you think we can have a wage-price spiral without, you know, the wages part.

The point is that wage increases can be a major driver of inflation only if workers consistently receive raises that substantially exceed productivity growth. And that just hasn't been happening.

In fact, the distinctive feature of the current economic expansion — the reason most Americans are unhappy with the state of the economy, in spite of good numbers for the gross domestic product and explosive growth in corporate profits — is the disconnect between rising worker productivity and stagnant wages. Over the past five years productivity, as measured by real G.D.P. per hour worked, has risen by about 14 percent, but the real wages of nonmanagerial workers have risen less than 2 percent.

Nor is there much sign that things are changing on that front. The official unemployment rate is low by historical standards, but workers still don't seem to have much bargaining power. (Does this mean that the official unemployment rate makes the job situation look better than it really is? Yes.) The Federal Reserve's Beige Book, an informal survey of economic conditions across the country, reports that over the last couple of months "wage pressures remained moderate over all, with the exception being workers with hotly demanded skills."

But if wage pressures are so moderate, where's the inflation coming from? The answer is soaring oil and commodity prices.

It's true that some widely used inflation measures, like so-called core inflation, strip out the direct "first-round" effects of rising energy prices. But there are still indirect effects, which usually take some time to show up in the data. Much of the recent rise in core inflation probably represents the delayed effect of the big run-up in fuel prices a few months ago. And unless something else happens to drive up oil prices — like, to give a wild example, a military strike on Iran — inflation will probably subside in the months ahead.

And bear in mind that many economists, including Ben Bernanke, the Federal Reserve chairman, have said that a little bit of inflation — say, 2 percent a year on average — is actually good for the economy.

It would be an exaggeration to say that there's no inflation threat at all. I can think of ways in which inflation could become a problem. But it's much easier to think of ways in which the Federal Reserve, wrongly focused on the phantom menace of a new wage-price spiral, could be slow to respond to bigger threats, like a rapidly deflating housing bubble.

So I don't fear inflation nearly as much as I fear the fear of inflation. And I wish the Fed would lighten up on the subject.

The Some of all Fears

June 12, 2006

June 12, 2006 

By: Paul Krugman 

Back in 1971, Russell Baker, the legendary Times columnist, devoted one of his Op-Ed columns to an interview with Those Who — as in "Those Who snivel and sneer whenever something good is said about America." Back then, Those Who played a major role in politicians' speeches.

Times are different now, of course. There are those who say that Iraq is another Vietnam. But Iraq is a desert, not a jungle, so there. And we rarely hear about Those Who these days. But the Republic faces an even more insidious threat: the Some.

The Some take anti-American positions on a variety of issues. For example, they want to hurt the economy: "Some say, well, maybe the recession should have been deeper," said President Bush in 2003. "That bothers me when people say that."

Mainly, however, the Some are weak on national security. "There's Some in America who say, 'Well, this can't be true there are still people willing to attack,' " said Mr. Bush during a visit to the National Security Agency.

The Some appear to be an important faction within the Democratic Party — a faction that has come out in force since the killing of Abu Musab al-Zarqawi. Last week the online edition of The Washington Times claimed that "Some Democrats" were calling Zarqawi's killing a "stunt."

Even some Democrats (not to be confused with Some Democrats) warn about the influence of the Some. "Some Democrats are allergic to the use of force. They still have a powerful influence on the party," said Michael O'Hanlon of the Brookings Institution after the 2004 election.

Joe Klein, the Time magazine columnist, went further, declaring that the Democratic Party's "left wing" has a "hate America tendency."

And when Senator Barack Obama told The New Yorker that Americans "don't believe that the main lesson of the past five years is that America is an evil hegemon," he seemed to be implying that influential members of his party believe just that.

But here's the strange thing: it's hard to figure out who those Some Democrats are.

For example, none of the Democrats quoted by The Washington Times actually called the killing of Zarqawi a stunt, or said anything to that effect. Mr. Klein's examples of people with a "hate America tendency" were "Michael Moore and many writers at The Nation." That's a grossly unfair characterization, but in any case, since when do a filmmaker who supported Ralph Nader and a magazine's opinion writers constitute a wing of the Democratic Party?

And which Democrats are "allergic to the use of force"? Some prominent Democrats opposed the Iraq war, but few if any of these figures oppose all military action. Howard Dean supported both the first gulf war and the invasion of Afghanistan. So did Al Gore. To all appearances, both men opposed the Iraq war only because they thought this particular use of force was ill advised and was being sold on false pretenses.

On the other hand, maybe appearances are deceiving. Shortly before the invasion of Iraq, The New Republic accused those who opposed the war — in particular, the editorial page of The New York Times — of hiding behind a "mask of nuanced criticism" when their real position was one of "abject pacifism."

But Peter Beinart, who was The New Republic's editor at the time, now seems to concede that the war's opponents were right. "Worst-case logic became a filter," he writes in his new book, "which prevented war supporters like myself from seeing the evidence mounting around us."

So what's going on here? Some might suggest that the alleged influence of the Some is no more real than the problem of flag-burning, that right-wing propagandists are attacking straw men to divert attention from the Bush administration's failures. And they wonder why people like Mr. Obama are helping these propagandists in their work.

Some might also suggest that Democrats who accuse other Democrats of closet pacifism are motivated in part by careerism — that they're trying to sustain the peculiar rule, which still prevails in Washington, that you have to have been wrong about Iraq to be considered credible on national security. And they're doing this by misrepresenting the views and motives of those who had the good sense and courage to oppose this war.

But that's just what Some Democrats might say. And everyone knows that Some Democrats hate America.

The DeLay Principle

June 9, 2006

 

June 9, 2006

By: Paul Krugman

The federal estate tax had its origins in war. As America moved toward involvement in World War I, Congress — facing a loss of tariff revenue, but also believing that the most privileged members of society should help pay for the nation's military effort — passed the Emergency Revenue Act of 1916, which included a tax on large inheritances.

But today's Congressional leaders have a very different view about wartime priorities. "Nothing is more important in the face of a war than cutting taxes," declared Tom DeLay, the former House majority leader, in 2003.

Mr. DeLay has since been dethroned, but the DeLay Principle lives on. Consider the priorities on display in Congress this week.

On one side, a measure that would have increased scrutiny of containers entering U.S. ports, at a cost of $648 million, has been dropped from a national security package being negotiated in Congress.

Now, President Bush says that we're fighting a global war on terrorism. Even if you think that's a bad metaphor, we do face a terrifying terrorist threat, and experts warn that ports make a particularly tempting target. So some people might wonder why, almost five years after 9/11, only about 5 percent of containers entering the U.S. are inspected. But our Congressional leaders, in their wisdom, decided that improving port security was too expensive.

On the other side, Bill Frist, the Senate majority leader, tried yesterday to push through elimination of the estate tax, which the nonpartisan Tax Policy Center estimates would reduce federal revenue by $355 billion over the next 10 years. He fell three votes short of the 60 needed to end debate, but promised to keep pushing. "Getting rid of the death tax," he said, "is just too important an issue to give up so easily."

So there you have it. Some people might wonder whether it makes sense to balk at spending a few hundred million dollars — that's million with an "m" — to secure our ports against a possible terrorist attack, while sacrificing several hundred billion dollars — that's billion with a "b" — in federal revenue to give wealthy heirs a tax break. But nothing is more important in the face of a war than cutting taxes.

The push for complete repeal of the estate tax has apparently failed, but I'm told that chances are still pretty good for a Senate deal that will go most of the way toward repeal. The Tax Policy Center estimates that two of the possible deals, compromises proposed by Senator Jon Kyl and Senator Olympia Snowe, would cost $293 billion over the next 10 years. An alternative proposed by Senator Max Baucus would cost $240 billion.

So even these so-called compromise proposals would cost several hundred times as much as the port security measure that was rejected as too expensive. But that's O.K.: nothing is more important in the face of a war than cutting taxes.

It's interesting, by the way, that advocates of estate tax repeal apparently aren't interested in a genuine compromise — raising the estate tax exemption from its current value of $2 million to $3.5 million while leaving the tax rate on estate values in excess of $3.5 million unchanged — even though such a compromise would preserve most of the revenue from the estate tax while exempting 99.5 percent of estates from taxation.

So a more precise statement of the DeLay Principle would be that nothing is more important in the face of a war than cutting taxes for very, very wealthy people, like the tiny minority of Americans who are heirs to really big estates.

Americans from an earlier era might have been puzzled by the DeLay Principle. They still believed in the principle enunciated by Theodore Roosevelt, who called for an inheritance tax in 1906: "The man of great wealth," said T.R., "owes a peculiar obligation to the state."

But the DeLay Principle isn't really that hard to understand: it's just like the Roosevelt Principle, but the other way around. These days, the state — or rather, the political coalition that controls the state, and depends on campaign contributions to maintain that control — owes a peculiar obligation to men of great wealth. And nothing is more important than cutting these men's taxes, even in the face of a war.

My apologies

June 9, 2006

Sorry about the delay in qetting last week's columns up. 

Shameless in the Senate

June 9, 2006

June 5, 2006 

 

By: Paul Krugman 

The Senate almost voted to repeal the estate tax last fall, but Republican leaders postponed the vote after Hurricane Katrina. It's easy to see why: the public might have made the connection between scenes of Americans abandoned in the Superdome and scenes of well-heeled senators voting huge tax breaks for their even wealthier campaign contributors.

But memories of Katrina have faded, and they're about to try again. The Senate will probably vote this week. So it's important to realize that there's still a clear connection between tax breaks for the rich and failure to help Americans in need.

Any senator who votes to repeal the estate tax, or votes for a "compromise" that goes most of the way toward repeal, is in effect saying that increasing the wealth of people who are already in line to inherit millions or tens of millions is more important than taking care of fellow citizens who need a helping hand.

To understand this point, we need to look at what Congress has been doing lately in the name of deficit reduction.

The Deficit Reduction Act of 2005, which was signed in February, consists mainly of cuts to spending on Medicare, Medicaid and education. The Medicaid cuts will have the largest human impact: the Congressional Budget Office estimates that they will cause 65,000 people, mainly children, to lose health insurance, and lead many people who retain insurance to skip needed medical care because they can't afford increased co-payments.

Congressional leaders justified these harsh measures by saying that we have to reduce the budget deficit, and there's no way to do that without inflicting pain.

But those same leaders now propose making the deficit worse by repealing the estate tax. Apparently deficits aren't such a big problem after all, as long as we're running up debts to provide bigger inheritances to wealthy heirs rather than to provide medical care to children.

And the cost of tax cuts is far larger than the savings from benefit cuts. Under current law — what I once called the Throw Mama From the Train Act of 2001 — the estate tax is scheduled to be phased out in 2010, but return in 2011. According to the Joint Committee on Taxation, making repeal permanent would cost more than $280 billion from 2011 to 2015. That's more than four times the savings from the Deficit Reduction Act over the same period.

Who would benefit from this largess? The estate tax is overwhelmingly a tax on the very, very wealthy; only about one estate in 200 pays any tax at all. The campaign for estate tax repeal has largely been financed by just 18 powerful business dynasties, including the family that owns Wal-Mart.

You may have heard tales of family farms and small businesses broken up to pay taxes, but those stories are pure propaganda without any basis in fact. In particular, advocates of estate tax repeal have never been able to provide a single real example of a family farm sold to pay estate taxes.

Nonetheless, the estate tax is up for a vote this week. First, Republicans will try to repeal the estate tax altogether. If that fails, they'll offer a compromise that isn't really a compromise, like a plan suggested by Senator Jon Kyl, Republican of Arizona, that would cost almost as much as full repeal, or a plan suggested by Senator Max Baucus, Democrat of Montana, that is only slightly cheaper.

In each case, the crucial vote will be procedural: if 60 senators vote to close off debate, estate tax repeal or something close to it will surely pass. Any senator who votes for cloture but against estate tax repeal — which I'm told is what John McCain may do — is simply a hypocrite, trying to have it both ways.

But will the Senate vote for cloture? The answer depends on two groups of senators: Democrats like Mr. Baucus who habitually stake out "centrist" positions that give Republicans almost everything they want, and moderate Republicans like Lincoln Chafee of Rhode Island who consistently cave in to their party's right wing. Will these senators show more spine than they have in the past?

In the interest of stiffening those spines, let me remind senators that this isn't just a fiscal issue, it's also a moral issue. Congress has already declared that the budget deficit is serious enough to warrant depriving children of health care; how can it now say that it's worth enlarging the deficit to give Paris Hilton a tax break?

Secretary, Protect Yourself

June 9, 2006

June 2, 2006 

By: Paul Krugman 

To: Henry Paulson, Treasury secretary-designate

So you decided to take the job, after all. It's no surprise that they wanted you. As the joke that's making the rounds puts it, they're so desperate they're scraping the top of the barrel. But most of us are surprised that you accepted.

No doubt you received assurances that like Robert Rubin, but unlike your predecessors in this administration, you'll get to be a real Treasury secretary. And you probably believe that those assurances can be trusted, if only because the Bush people currently need you a lot more than you need them.

But Paul O'Neill, who received tremendous acclaim from the news media when he was appointed Treasury secretary, must have believed the same thing. The fact is that you'll be treated well as long as you are perceived as someone who adds credibility with people outside the administration, and not a moment longer. Yet I'm sure you're already under pressure to say things that will fatally undermine your credibility.

Before we get to the specifics, you need to disabuse yourself of any illusion that this administration rewards loyalty. Nobody was more loyal than Larry Lindsey, President Bush's first top economist. Yet when Mr. Lindsey blurted out an inconvenient truth — that the Iraq war was likely to cost a fair amount of money (although we now know that his estimate was only a small fraction of the true cost) — he was fired.

And not just fired; he was fired in as insulting a fashion as possible, including snide remarks about his personal appearance. (White House aides made a point of telling reporters that Mr. Bush complained about Mr. Lindsey's failure to exercise.)

So what are you being asked to do that will undermine your credibility? Right now, I'd guess, you're being pressed to support the administration's illusions about how the economy is doing.

Americans are very unhappy with the state of the economy. According to Gallup, only 4 percent of the public considers the economy ''excellent,'' and only 25 percent considers it ''good.'' And there's good reason for this unhappiness. Although profits and C.E.O. compensation have soared, most workers are significantly worse off than they were a year ago.

The official line, however, is that it's a great economy, but that Americans for some reason aren't hearing the good news (just like they aren't hearing the good news from Iraq). Mr. Bush — who, by the way, isn't the affable guy you may have thought you met — doesn't seem as if he realizes that the economy isn't all that good; in his public appearances he seems peeved that he isn't getting credit for a great economy. And he expects you to explain to working Americans that the trouble they're having paying their bills is just a figment of their imagination.

Moreover, if past experience is any guide, you won't be pressured just to spin on the administration's behalf, you'll be pressured to lie.

Look at what happened to Edward Lazear, the chairman of the president's Council of Economic Advisers. Last month Mr. Lazear and another member of the council published an op-ed article in The Wall Street Journal containing this astonishing assertion: ''The president's tax cuts have made the tax code more progressive, which also narrows the difference in take-home earnings.''

Now, you can play games with the meaning of the word ''progressive,'' but by any measure the Bush tax cuts have made differences in after-tax earnings wider, not narrower. And just like that, any credibility that Mr. Lazear, a well-regarded academic without a prior reputation as a political hack, may have brought to the job was gone.

What will they ask you to lie about? Maybe you'll be asked to declare that we're on track toward a balanced budget. Or maybe you'll be asked to lie about environmental policy. Some of the administration's right-wing supporters opposed your selection because you are known as a supporter of action against global warming, so the political types might want you to throw them a bone by endorsing the administration's failure to do anything about the threat.

Right now, you're being flattered. You have a natural urge to be a team player. But if you play the game your new bosses want you to play, your credibility with the public will evaporate in no time at all. And when you're no longer useful to your new friends, you'll be tossed aside.