1988-91, Gorbachev, Thatcher and Reagan left the stage. Since then, there has been only one statesman: Vaclav Havel. Since his retirement, our planet has been a lonely place for those of us who expect moral leadership and imagination from national leaders.
The only real difference between Israel-Palesting and apartheid South Africa, and French rule in Algeria, is that in Israel-Palestine, the rulers and holders of advanced technologies are the demographic majority. For now. Recall the eventual fate of apartheid and French rule.
We also need to (re)read Isaiah Berlin's "The Fox and the Hedgehog."
This election was not about economic policy because I submit that the Great Recession is over. The employment population ratio has been declining since 2000 and is now where it was in 1978, seen at the time as a normal year for the American economy. Americans broadly accept that out of every 13 jobs in existence in 2006, one is gone for good. Most Americans can get by in the current labor market but for one thing: mortgage commitments, undertaken between 1998 and 2007, that they can no longer afford.
About 40% of American voters are committed conservatives: their value judgements are grounded in private property, free enterprise, traditional marriage, and church membership. For them, fiscal policy is low tax rates and a mild and procyclical budget surplus. Employers should enjoy a maximum freedom to hire and dismiss, and a minimum of labor market regulation. The employee's best friend is thought to be a competitive labor market.
About 40% of American voters are committed Democrats: their value judgements are grounded in personal freedom in all dimensions but the economic one. They advocate for a fiscal policy is strongly procyclical, one that also involves income redistribution via taxes and transfers. They welcome a variety of labor market regulations, and the employee's best friend is seen to be labor unions and a benevolent and paternalistic Federal govt.
About one fifth of the electorate sits between these two camps, and this is where the median voter lies. A Presidential campaign is an enormously expensive appeal for the support of this elusive median voter.
Two facts. Obama carried in 2012 every state he carried in 2008, except Indiana, North Carolina, and Omaha NB. (2) Nearly all rural counties were carried by Romney; Obama ran well in urban areas and college towns. To me, it is quite clear that there are two clashing visions of what American is and should be. One vision is a traditional small town one, where many people are entrepreneurs and many businesses process things. The other is an urban one, where most people are employees, and many jobs involve the shuffling of abstractions by relatively educated people. A growing fraction of urban residents lacking formal education are unemployed or out of the labor force. This is a story that has been unfolding since the 1970s, and nobody, including Obama, knows what to do about it.
I agree that debt issued to finance long lived infrastructure should not count as part of the conventional deficit, as long as governmental accounting is scrupulously honest about the distinction between the current and capital budgets.
I also agree that in nations where the tax / GDP ratio is under, say, 35%, tax increases have an important role to play in deficit reduction. I advocate 250-350B of cuts in Federal expenditure, combined with at least a 200B increase in personal taxes, and a 150B increase in corporate income taxes. This should reduce the Federal deficit to about 3% of GDP. I would welcome a further orderly reduction of the deficit.
Stiglitz seems to think that current level of the Federal deficit and its rate of growth are not problematic. They do not seem problematic only because interest rates are artificially low. If the ex post real interest rate on Federal borrowing returned to 1%/year, the Federal budget would be in a major crisis.
Finally, it is wrong to focus on unemployment as a measure of how subpar the American economy is. The trouble is that the distinction between being unemployed and being out of the labour force is mostly subjective. The unemployment rate does not do justice to people employed part time who wish they were employed full time. The employment-population ratio is much more operational, but it harder to interpret because it is not a stationary time series. The BLS does not report the employment-population ratio I would prefer to focus on, namely that for persons between the 25th and 62nd birthdays, broken down by gender.
The employment-population ratio hit its all-time high in 2000. The current level of that ratio is about what it was in 1977-78, then seen as normal years. The 1980s and 90s witnessed a massive shift of married women into employed status. This century has witnessed a substantial decline in manufacturing employment. These and related data can be found on the FRED database run by the St. Louis Fed.
The trouble with offsetting the national debt with the public sector's assets, is that those assets seldom have an objective market valuation. Hence there is an irresistible temptation to overvalue those assets in order to engage in profligate fiscal policy. Greece may soon discover that its public assets cannot find buyers at anything like the price it hoped to get for them.
Continental Europe is a different kettle of fish. Recent events have shown that there is a real risk that debt markets will not buy the sovereign debt of many European nations unless they agree to pay punitive interest rates of a kind that make further deficits unaffordable.
Europe fell into its current crisis having much higher levels of taxation and expenditure (scaled by GDP) than was the case in the USA. Hence there is much less scope for tax increases, and spending cuts will be more painful. In much of Europe, there is no way forward that does not involve significant reductions in the generosity of their welfare states, and in labour market regulations that make job separations very costly. Difficult separations make for reluctant employers.
Shiller makes a good point, one grounded in the careful attention to units of measurement that he (and I) were taught in high school. GDP is a flow per unit time. GDP is reported annually and quarterly. This is convenient and conventional, but also entirely arbitrary. Hence the denominator of the debt to GDP ratio features a periodic time unit, the choice of which is arbitrary. The longer the time unit, the lower the ratio. Hence the ratio of debt to GDP is arbitrary and meaningless.
However, Shiller seems to imply that there is no need to worry about the level of govt. borrowing, and that is an impression I wish to forestall.
I submit that there are basic three categories of public debt. that held by (1) the central bank and public trust funds, (2) by domestic private parties, and (3) foreign entities. Finally, there is (4), debt used to finance long lived infrastructure projects, about which I will say no more than that this is a very valid use of the govt's borrowing power. (1) is scarcely debt at all, because what is a liability to the Treasury is also an asset of another branch of the Federal govt. (3) is the most troubling, especially when the debt is denominated in a foreign currency (a problem for the PIGS but not for the USA).
So anything divided by GDP should have the same time unit as GDP itself. I propose the interest paid on the debt, calculated for each of (2) and (3) in the preceding paragraph. This is a measure of the carrying cost of the part of the Federal debt that is owed to parties outside the Federal govt.
The USA NIPA report the interest paid on (3). The Fed discloses the interest on the Federal debt it holds. So far so good. But calculating the interest paid on debt held by Federal govt. trust funds is not easy. (2) is easily calculated as the residual after calculating (3) and (1), but I bet calculating (1) will prove elusive. I invite the NIPA, especially Table 3.2, to adopt the framework I set out here.
The only way to evaluate the interest to GDP ratio is relative to the historical record. Recent values of the interest to GDP ratios calculated from the available NIPA data are not too worrying, simply because nominal interest rates are so low. But current nominal rates imply negative real rates. When interest rates rise, the interest to GDP ratio will rise, as will the fraction of every Federal tax dollar devoted to interest on the privately held public debt. Taxes will have to rise, or current government expenditure will have to be cut. This is the sense in which the rise in Treasury borrowing this century amounts to a Sword of Damocles hung over the American economy.
The problem is that two tax-related ratios currently have values that are unusually low by historical norms. One such ratio is that of Federal income and payroll taxes to nonimputed personal income. The other is of corporate income taxes to corporate cash flows, which is lower now than at any time since the Great Depression. Raising those ratios to the their average levels over 1987-2007 would generate approximately 350B of tax revenue. Further tax increases and expenditure cuts may be needed to get our house in order.
The Flow of Funds accounts reveal that American corporations currently hold about 2.5 trillion of financial assets having a low risk of capital gain or loss. Corporate profits are at an all-time high, but capital expenditures are anemic. I conclude that the American corporate sector broadly understands that current American fiscal policy is a temporary fool's paradise.