Miracles for Christmas

Jeff Madrick

It’s the Christmas season, so why not indulge ourselves? Let’s ask for a few miracles. In fact, we in America have had a miracle and everyone has noticed it, Occupy Wall Street. There was another even bigger one in the Mideast. Not only an Arab spring in Egypt and Libya, but peaceful voting in Tunisa. There may even be a Slovak spring.

So here is my wish list for miracles—ASAP. More or less in order of importance.

• Self-awareness in Germany

I wish that Germans would realize their economic dominance is dependent on their indebted neighbors. An economic model that emphasize net exports as a major source of growth is, internationally, a debt led model. It will require buyers of those exports to borrow. Imbalances in the eurozone are not sustainable.

It gets worse. Germany also believes it has the moral right to demand that others suppress wages and government borrowing, ensuring slow growth among their European partners. So I also wish Germany a modicum of rationality in their public discourse. Even right wing columnists recognize that if Germany were on its own due to a break up of the eurozone, the value of the Deutsche Mark would have been driven up, undermining its export advantage. Now Germany is imposing recession in Europe. The flight to German debt, which is keeping their interest rates low, may soon end.

Finally, I wish Germany a better memory. When they were flat on their backs, America helped rescue them after World War II with the generous Marshall Plan and by opening up its markets to their goods. After World War I, when they were flat on their back, the young British Treasury official, John Maynard Keynes, tirelessly argued not to assess them huge reparations, predicting it would make totalitarianism inevitable. Yet all they seem to remember is inflation.

Ah, so one more wish. They need better leaders with a firmer and broader grasp of economic theory and economic history, who think a refusal to issue a eurozone bond and prevention of ECB sovereign lending are critical. They seem to be run by youngish anti-inflation ideologues filled with chalkboard economic pieties.

• Republican presidential candidates learn arithmetic.

It is hard to believe that the tax cut plans of the leading Republican candidates were developed by anyone with even sixth grade arithmetic skills. They lean towards flat rates on all income because it will help the wealthy most.  But the sheer ferocity of the assault on the middle class is stunning. Herman Cain had proposed his 9-9-9 plan—a 9 percent sales tax, a 9 percent income tax, and a 9 percent tax on business value added. The Tax Policy Institute figured it amounted to an average of about $440,000 in annual savings for those who earn $1 million or more, and about a $4000 tax increase for those in the middle of the income spectrum.

But, you say, Cain got bounced. Well, let’s take a look at Newt Gingrich’s plan. As I write, he is the Republican front runner.  He is proposing a flat tax of 15 percent while retaining more deductions, such as for mortgage interest, than the Cain plan. Gingrich’s arithmetic is even more ridiculous.  Those who earn $1 million or more get an average tax savings of $607,000 while those who earn $40,000 to $50,000 get a tax savings of about $800. But the shocker is that the Tax Policy institute figures that by 2015, the Gingrich tax cut would cost some $1 trillion in lost tax revenues annually to the government.

• Alberto Alesina recants his work on austerity economics.

Harvard’s Alberto Alesina has been one of the leading economists advocating the case that reducing the federal deficit during a period of slow or falling growth, especially by cutting government spending, can result in an expanding economy.  This is in direct refutation of Keynesian theory, of course.  He and others base this work on supposedly clear empirical examples from recent history. Now, on the basis of such studies and an extreme anti-inflation bias, almost all of Europe is undertaking this version of austerity economics, led by Britain, and widely imposed by the Germans, as noted above.  Such fiscal consolidation has led to falling rates of GDP growth or recession in Ireland, England, Greece, and on. It may well lead to serious recession in Italy and France.  The U.S. is also basically following austerity economics.

But the methodological approach of economists like Alesina is seriously flawed. At last, in 2011, a strong paper by economists James Guajardo, Daniel Leigh, and Andrea Pescatori and published by the International Monetary Fund, hardly a progressive institution, shows just the opposite. The earlier analyses is that they usually measure policy changes by changes in budget deficits. A deficit will go down as the economy expands, but does that mean a reduced deficit policy cause an expansion. When adjusting properly for policy intentions and timing, the IMF paper shows that fiscal contractions typically contract economies.  My miracle would be for Europe and the U.S. to live by the true evidence.

• Senator Ron Wyden says his Medicare proposal was a very bad joke.

Wyden recently teamed up with Congressman Paul Ryan to offer a Medicare reform proposal that is simply a disaster. It would allow seniors to opt out of Medicare to buy a private policy and get reimbursed for its cost by an amount equal to the second cheapest policy available that meets certain criteria. But we know the fallacy of such competition. The private sector will steal away the healthy seniors from Medicare, making it the more expensive alternative.

The claim would be that these plans must meet minimum standards. But we already seeing Obama caving into Republican demand to let the individual states set standards for Obamacare. More important, Wyden and Ryan would put a cap on how rapidly the insurance reimbursement would rise that is significantly lower than healthcare will likely grow.

The sum and substance is this. Instead of reforming healthcare, Wyden wants to reduce federal outlays on the backs of seniors who will lose coverage, get inferior coverage, or pay a lot more. How wide will this crack grow among Democrats?

Yes, I have a few more Christmas wishes. I’d like America to adopt Medicare for All and public financing for all national elections. Are these too much to ask to save a great nation?