JOBS | Trump Compared with Obama, GW Bush, Clinton

May 8, 2020, 8:45 am—Three and a half years ago, in December 2016, this blogpost reviewed two numbers important for working-age Americans, the unemployment rate and the employment-population ratio, for the prior three administrations. These are seasonally adjusted monthly numbers. This post updates the records of the last four presidents.

1. UNEMPLOYMENT RATE

	Bill Clinton 1993-2001	G. W. Bush 2001-2009	Barack Obama 2009-2017	Donald Trump 2017-April 2020
Unemployment Rate, last prior full month, percent, s.a.	7.4	3.9	7.3	4.7
Unemployment Rate, last full month, percent, s.a.	3.9	7.3	4.7	14.7
Change, percentage points (– = rise)	3.5	-3.4	2.6	-10.0

In December 2016, the last full month of President Obama's administration, the unemployment rate was 4.7 percent. The unemployment rate is the number of unemployed, 7.5 million, divided by the labor force (employed + unemployed), i.e., 159.6 million—4.7 percent.

The unemployment rate rose under President Trump to 14.7 percent in April 2020, an increase of 10 percentage points. The New York City Comptroller earlier this week projected an unemployment rate for NY City of 22 percent in June.

President Obama's last full-month 4.7 percent unemployment rate compares with 7.3 percent in December 2009, the last month of President George W. Bush's administration. That is a reduction of 2.6 percentage points.

This is turn compares with an increase in the unemployment rate of 3.4 percentage points during President G.W. Bush's administration and a decrease of 3.5 percentage points during President Clinton's administration. 

2. THE EMPLOYMENT-POPULATION RATIO

	Bill Clinton 1993-2001	G. W. Bush 2001-2009	Barack Obama 2009-2017	Donald Trump 2017-April 2020
Employment-Population Ratio, last prior full month, percent, s.a.	61.4	64.4	61.0	59.8
Employment-Population Ratio, last full month, percent, s.a.	64.4	61.0	59.8	51.3
Change during administration, percentage points (– = decline)	3.0	-3.4	-1.2	-8.5

The December 2016 Employment-Population Ratio was 59.8 percent. It fell to 51.3 percent in April, a decline of 8.5 percentage points from March. This is the lowest rate and largest over-the-month decline in the history of the series, which dates back to 1948. The employment-population ratio is defined by the BLS as the number of employed people, 152.1 million, divided by the civilian noninstitutional population, 254.5 million.

Trump visits Obama, 2016  

The Employment-Population Ratio has certain advantages as a labor market measure over the unemployment rate. It is a more reliable indicator over time because it is unaffected by variations in interviews, sampling, telecommunications preferences or definitions of the unemployed. 

In December 1992 when President Clinton came to office, the employment-population rate had been falling and was at 61.4 percent. It rose during his administration to 64.3 percent, an increase of 2.9 percentage points. Under President G. W. Bush, the rate fell by 3.3 percentage points to 61.0 percent. Under President Obama the rate fell further to 59.7 percent, a drop of 1.3 percentage points. 

On both measures, as of April 2020 the last two Democratic administrations outperformed both the Bush 43 and Trump administrations. 

AMAZON AND GM | Trumponomics Takes a Hit

From 20 final cities, Amazon chose to locate in two
states, NY and VA, that voted for Clinton in 2016.
Meanwhile, MI and OH, which voted for Trump,
 are taking the brunt of GM's layoffs.

The following is posted by permission of Dana Chasin, who sent this out as Update 314 to his list, under the title: "An Economy Shifting Gears: What do Amazon's new HQs and the GM Layoffs Portend?" GM's layoffs and Amazon's new headquarters expansions show that Trump's bets on revival of car manufacturing, as opposed to embrace of technology, are not paying off. States that voted for Clinton in 2016 are winning and two states that believed in Trump's promises for manufacturing are losing. Trump's beggar-my-neighbor tariff policies are not helping American manufacturing.

Major tidal shifts and cross-currents underlying the changing American industrial landscape have been on full display in recent weeks. Last month, Amazon announced it was going to base its second headquarters out of both New York and Virginia, promising to bring 25,000 jobs to each. [This is a significant economic victory for two states that voted for Hillary Clinton for President in 2016.]

In an equally important but opposite development yesterday, General Motors announced its plan to eliminate up to 14,000 jobs in five plants in three states and Canada. Three of the plants are in Michigan and Ohio, which voted for Trump after campaign promises to revive manufacturing.

GM's surprise decision has rattled the Trump Administration and Republican leadership, challenging the belief that the economy is running fine on high octane fuel and should continue unfettered.

GM’s announcement comes less than two years after it announced it would add or keep 7,000 jobs in the United States. It translates to an expected loss of 14,700 jobs. The decision comes only a month after GM offered buyouts to as many as 18,000 long-time employees, only 4,000 of whom accepted the offer by the November 19 deadline – 3,000 employees short of its 7,000 target. With the buyout program behind schedule, the decision to idle five facilities did not come as a surprise to many. The Lordstown assembly plant in Warren, Ohio, for example, had gone from three shifts per day in January 2017 to one shift this past April.

The United Auto Workers said it would challenge GM’s decision. If GM still hasn’t reached its 7,000 buyout goal by January, further involuntary cuts are likely.

While the Tax Cuts and Jobs Act (TCJA) of 2017 purported to create record tax windfall for corporations to reinvest, the picture with GM is more complicated. In GM’s case, the TCJA did not account for “deferred tax assets” which the company was able to accumulate due to poor performance predating the Great Recession. These assets allow companies to reduce taxable income, meaning GM had already been afforded a low tax bill for over a decade. The newly reduced corporate tax rate therefore rendered these assets less valuable, forcing GM to take a $7 billion charge against earnings during the fourth-quarter of FY 2017.

Executives expected to see an eventual benefit from the new tax law, but not for years to come. It’s hard to claim that in absence of sizable deferred tax assets, GM would have even used their $157 million in federal savings to support American plants and employees. An October survey published by the National Association for Business Economics reported 81 percent of 116 companies surveyed had not changed plans for investment or hiring as a result of the TCJA.

The tariffs put forward by the Trump administration are another possible contributing factor to GM’s financial troubles. The timeline of the trade war is highlighted below:

June 1, 2018: The Trump Administration ended the exemption of Mexico, Canada and the EU from aluminium and steel tariffs. GM representatives warned the White House that these tariffs would drastically hurt the firm, saying that “this could still lead to less investment, fewer jobs, and lower wages for our employees.”

July 25, 2018: GM was forced to reduce its profits forecast for 2018, tanking stock by 4.6 percent. GM’s CFO predicted the original tariffs in March and the ending of exemptions to the US’s most trusted partners in June could add “as much as 700 million to GM’s costs” for FY 2018.

September 24, 2018: The White House compounded the problem by unveiling a new, stringent set of tariffs on Chinese automotive exports, putting in place a 10 percent levy on brakes, car batteries, tires, etc. Analysts predict these new tariffs will lead to higher sticker prices for cars and lower car sales. GM, like all other US car manufacturers, relies on foreign-based subsidiary plants and goods to create finished products, making broad tariffs doubly damaging to an already wounded industry. With GM historically leading the way in moving jobs to Mexico and a less favorable domestic/international tax rate differential introduced in the TCJA, the Trump administration's tariffs have only produced escalated offshoring.

Starting on the campaign trail, President Trump made a series of promises to the American people about jobs, specifically jobs in manufacturing. During a speech in Michigan in October 2016, Trump promised to “bring back ... jobs” and said “the long nightmare of jobs leaving Michigan will be coming to an end.”

He blamed past factory closures on Democratic failures and promised not to let that happen again. The GM decision reflects the fecklessness of Trump’s approach. Many voted for him because of his pledge to save the manufacturing industry.

Instead, he has put forth policies that undermine that goal and expose fears that become self-fulfilling trade prophesies in the form of retaliation. Plants will be closing in two states that were key to Trump's victory – Michigan and Ohio.

The GM closures thwart his guarantees to protect manufacturing and undermine his portrayal of a healthy economy that is growing with no end in sight and equitable for minority groups.

Almost simultaneously, Amazon announced its locations for its new HQ2. After a country-wide tax benefit bidding war, it has pledged to bring 25,000 jobs to both New York and Virginia, as well as an estimated 67,000 and 22,000 indirect jobs to each respectively.

In return, Virginia agreed to give Amazon $819 million and New York agreed to $1.85 billion. Both states believe the benefits accrued from Amazon will far outweigh these costs. Gov. Ralph Northam of Virginia expects “Amazon to invest $2.5 billion in the commonwealth and create $3.2 billion in tax revenue.”

Will this model work? Amazon is encouraged to fulfill its jobs promise through "performance-based direct incentives," meaning that for each pledged job that comes to fruition, they get a certain amount of tax breaks. This kind of city and state tax break is by no means an uncommon way of driving business to invest in a given area, and has been utilized in the past by other tech company giants, such as Google.

Although the model has proven very effective at creating jobs, there are some accompanying flaws. In Seattle, Amazon’s first HQ brought an economic boom and more than 40,000 jobs to the city; it also cost taxpayers hundreds of millions of dollars in ongoing infrastructure and transportation upgrades around the site, while neglecting other areas of the city. Affordable housing underwent a serious crisis. However, Amazon has worked with Virginia and New York governments to try and get in front of some of these issues, pledging money for additional schools and low-income housing.

Moreover, Arlington and Long Island are not Seattle. Bringing 100,000 jobs to these areas is a boon even to these booming coastal metropolises.

Trump has criticized Amazon repeatedly in the past and again following the announcement of HQ2. The economic tide seems to be working against him – 44 cents of every dollar spent online goes to Amazon. As much as Trump wants new jobs in the manufacturing sector, the evidence shows that the tech sector is the one to watch. Tech jobs offer the same, if not better, benefits as traditional manufacturing jobs, such as 401ks for salaried workers. States are quite literally fighting over these Amazon jobs, whereas auto-manufacturing jobs in the rust belt have become more burdensome than beneficial.

Even GM will be using its hefty savings to further bulk up its electric and autonomous vehicle development through R&D programs that already see more than $1 billion a year in company investment. Trump can no longer keep up the facade of a booming economy fueled by the manufacturing industry, and his supporters, especially those in Michigan and Ohio, must adjust to these false hopes and broken promises.

MED BIZ | Aetna Opt-Out

"Don't hate the players. 
Fix the game." 
The New Yorker http://bit.ly/2c9nXUb

See other MED BIZ posts:  Clinton Health Plan 2009 . 

USA TAX | Fed Exemptions Double, 1994-2009 (Updated May 26, 2016)

Tax exemptions reduce the amount of tax revenue that governments get from income, sales or property taxes. 

They are called "tax expenditures". Legislators love 'em, because:

• They are hidden from view.
• They benefit a favored group of companies or individuals who are thereby indebted to the legislators...

U.S. Government tax expenditures have doubled in 15 years–from about $600 billion during the early Clinton years to $1.2 trillion in the Obama Administration. The consequence is that the lost revenues must be offset in one of three ways: 
(1) more tax revenues must be raised by adding new taxes or raising tax rates on existing taxes; OR
(2) expenses must be cut; OR 
(3) the government must make up the difference by incurring a deficit and borrowing to cover it.

Don't blame Obama for this. They have been flat during his administration. Tax expenditures started rising at the end of the Clinton administration and soared after 2000 at the beginning and end of the George W. Bush administration. 

That's the long story short. For details, go to A Brief History of Tax Expenditures published by the Tax Foundation, which is an organization that grieves for public tax burdens and seek to inform the public about why they should take it personally. There is a podcast available here. To subscribe via RSS, click here.

OBAMA | First-Term Green Legacy

President Obama achieved a great deal in his first term to advance energy efficiency and renewable energy. But his objective of making significant progress to slow climate change was not achieved. It was beaten by the fossil-fuel lobby acting through the know-nothing opposition of Tea Party Republicans or their brow-beaten colleagues.

With his reelection, in the teeth of huge spending by his opponents, the President is in a good position to get through some of his original program that was left on the table. The lessons of Hurricane Sandy may help his case.

Obama's Eco-Achievements

Obama started by making solid appointments, with Steven Chu as Secretary of Energy and Lisa Jackson as Environmental Protection Agency Administrator. He supported climate-change proposals at Copenhagen, and admitted that what was achieved there "was not enough". Here's what he did achieve in his first term, mostly through his budgeting and regulatory authority:

1.    Obama put energy efficiency and renewable energy on state agendas. The $90 billion investment in green jobs in the stimulus bill may not immediately have created 5 million new jobs — many states were not ready to take advantage of the programs in a timely way. But it encouraged states and localities to focus on needed environmental initiatives and the longer-term impact of their efforts is real and accounts for about half of the 23 percent lower projections in just a few years of 2020 emissions.

2.    His EPA has twice raised auto fuel-efficiency standards under the Clean Air Act. Nixon's Clean Air Act was the basis for the Obama EPA's higher Corporate Average Fuel Economy ("CAFE") standards, first requiring 35.5 mpg fuel efficiency by 2016 and now 54 mpg by 2025. By using existing legislation, Obama moved America forward despite the Congressional stalemate.

3.    He regulated carbon emissions under the Clean Air Act. Obama's EPA won a major victory in June 2012 when the U.S. Court of Appeals, DC Circuit, unanimously affirmed EPA's ruling in 2009 that (1) greenhouse-gas emissions pose dangers to public health and welfare and (2) four measures would be instituted to regulate carbon emissions.

4.    He saved the U.S. auto industry and its technology-generating capacity. The auto industry bailout was not just a job-creation success. By keeping this major component of U.S. industry alive, the President kept the United States as a strong player in electric-car technology and in the campaign to generate more efficient batteries.

5.    He has used federal purchasing power to reduce carbon emissions. He has made energy efficiency part of the mandate and procurement criteria of theGeneral Services Administration and has supported the Energy Star rating program of the EPA and Department of Energy.

6.    He has supported four rounds of the ARPA-E program for energy technology research. The Advanced Research Projects Agency, once part of the Department of Defense, has an energy component administered by the Department of Energy. It has so far made awards for 107 project awards, with amounts ranging from $400,000 to $6 million each, for research on such topics as "electrofuels", carbon capture, batteries, electric grid, thermal energy storage, and rare earth substitutes. It would be hard to overestimate the long-term importance of this effort for the United States and for the planet.

Why Obama Failed to Address Climate Change Directly

That Obama didn't succeed in doing more on climate change reflects unpredictable developments. The BP oil spill early in his first term discouraged offshore oil drilling, and the Fukushima nuclear meltdown discouraged further nuclear power development, constraining his options. But most important, the Republican House of Representatives adopted a totally negative stance toward the President's climate-change goals. The entire minority membership of a committee headed by Senator Barbara Boxer's committee boycotted hearings on the House-passed Waxman-Markey cap-and-trade bill. I had a ringside seat to observe the crackup of the legislation in the 111th Congress, as senior economist for Congress's Joint Economic Committee. The bill was debated to death in the Senate. After the election of more Tea Party adherents in 2010, it was all over.

In 1970, it would have been hard to believe that 42 years later the nation still would not have such a carbon tax or a carbon-price-setting mechanism like a cap-and-trade system. Green issues then had bipartisan support. President Nixon's strong Clean Air Act amendments to the original 1963 Act created the EPA, William Ruckelshaus became its first head (and the late Russell Train its second), and new water-pollution laws were passed after two years.

What stopped progress? OPEC's decision to create an oil shortage. Inflation cascaded through private and public prices and economic concerns overtook environmental ones. The GOP took on the mantle of environmental deregulation in the name of promoting economic growth, although significant instances of environmental progress have occurred under Republican leaders since Nixon.

The GOP's Opposition to Environmental Rules Is Negotiable

President Reagan, for example, may have cut social and environmental budgets, including one-third of EPA spending, but in his second term he did something important. He noted the high cost of ozone-depleting chlorofluorocarbon (CFC) gases and he promoted a worldwide reduction via the 1987 Montreal Protocol. This Protocol has been described as the most successful international convention ever, signed by 197 countries and the European Union, and it has stopped the growth of the ozone hole although some aerosol substitutes, such as hydrofluorocarbons, continue to contribute to global warming even though they don't damage the ozone layer.

President George W. Bush during most of his administration was, like Reagan, antagonistic to environmental regulation, but in the latter years of his presidency he championed significant initiatives to conserve natural resources that became law, and he moved the country along on the path toward greater energy efficiency.

Given that Reagan and Bush 43 added valuable environmental achievements late in their second terms, President Obama has some encouraging precedents. The fact that his re-election results are strong may have something to do with Republican leaders entering the 113th Congress with a more serious inclination to cooperate with President Obama than two or four years ago. He now has a real opportunity to achieve more of the change he promised in 2008.

Proposals for the President's Second Term

Climate-change legislation deserves to be near the top of the President's second-term agenda. Even if the United States magically reduced its emissions to zero, the planet will be threatened by the continuing rapid industrialization of China, India and other emerging economies. For the United States to exercise global leadership on this important topic, it must do more at home.

Some things will happen on their own. The Energy Star rating has been shown in several articles by Professor John Quigley and others to raise the value of a property significantly for both sale and rental, so this certification has legs. Venture capitalists are supporting renewable energy projects. Vehicle manufacturers are hard at work on fuel and battery efficiency. HSBC Bank projects the low-carbon economy will triple to $2.2 trillion a year by 2020.

The President in his second term has a Groundhog Day chance to push forward programs and laws that directly address climate change. Through the last two Congresses, Carol Werner at the EESI has faithfully been pushing out information on a large number of Congressional initiatives in the arena of clean energy and climate strategies. Here are five ways ahead that seem to me to be most promising:

1.    A carbon tax. The lack of progress of the Waxman-Markey bill in the Senate despite support of the President's Climate Action Partnership has reopened bipartisan consideration of a direct tax on carbon of perhaps $20 a ton. This might add 10 percent to the cost of gasoline, but it would lead to correct signals being provided throughout the economy. Pigou-type taxes on pollution ("tax bads, not goods") are viewed with a friendly eye by many analysts on both the left and the right.

2.    Trading permits — the Cantwell bill. As a backup for a carbon tax or a parallel strategy, the limited cap-and-trade bill proposed by Senator Maria Cantwell (D-WA) is a good plan that could be a focus for bipartisan negotiation. It creates an "upstream" (at the power-generation source) market for carbon among large energy producers and users. It seems to me easier to understand and execute than the broadly based Waxman-Markey bill.

3.    Championing state and local initiatives. With Hurricane Sandy as the backdrop, support local environmental investments and rethinking of zoning and building codes or planning for surge protectors. Green incentives in the stimulus bill have encouraged states and localities to act to improve energy efficiency and reduce emissions. Without a carbon tax or a national market for carbon permits, these efforts need encouragement. The President can help revitalize them with national support of subnational and private investments.

4.    Using the Presidency to make the case for change. Michael Northrop, program director for sustainability at the Rockefeller Brothers Fund, urges the President to use his second-term status to tell the truth about the U.S. coal industry, its grave impact on climate change, its declining share of electric-power fuel, its declining employment. Coal employs 40 percent fewer Americans than a few years ago as U.S. solar jobs grow 13 percent annually. He recommends the President convene a national bipartisan climate action planning council composed of sitting and former state and local officials, company CEOs and civic leaders, with leadership by a senior advisor in the White House appointed for this task. A good idea.

5.    Continued agency actions. Since the Congress is unpredictable, the most reliable way forward is to continue exercising executive authority through the EPA, Department of Energy and other agencies to lower emissions and to build clean-energy markets. The President has already done much by using federal buying power to support clean-energy markets, but he can do more. Catalogs of options include those of the Center for Climate Strategies and the Presidential Climate Action Project.

The timing of Hurricane Sandy could not have been better for purposes of bringing more business leaders on the side of action to address climate change. Stay tuned and make your voice heard.

---

Dr. Marlin is Chief Economist for the New Jersey Institute for Social Justice in Newark, NJ.  The views expressed in this post are not necessarily those of the Institute.  The abopve post appeared on the Sallan Foundation site a few days ago.

Misery Index Climbs

Wall Street indexes rise and fall but the economic misery index goes on forever as a single-number summary of what is happening on Main Street. I therefore think it is well worth watching as a measure of how the economy is doing. The index (simply the sum of unemployment and inflation rates) rose in June to 10.5, the highest level in 15 years, i.e., since January 1993, the month President Bill Clinton was inaugurated and President G.H.W. Bush left office. Under Clinton the index improved but it has recently climbed back to what it was when he took over.

Misery Index in the Last Month in Office of Recent Presidents:
Carter: 19.3
Reagan: 10.1
Bush 41: 10.6
Clinton: 7.9
Bush 43 (as of June 2008): 10.5

More (Huffington Post)

McCain's Response to Meltdown Is “Dubious”

Senator McCain's approach to the credit crisis was today described by the LA Times as “dubious”. In Santa Ana, Orange County (home of Countrywide Financial and New Century Financial, failed leaders of the subprime fiasco), McCain called for minimal federal interference in financial markets and instead for (1) voluntary measures by banks to assist borrowers having trouble keeping up with payments and (2) a summit to discuss discouraging banks from writing down the value of distressed housing. The first proposal is already happening; the second is a shocker. Is McCain really serious about interfering with the markdown of bank real estate assets? The Japanese prolonged their recession by many years trying that trick.

Meanwhile, in Philadelphia and New York, Senators Clinton and Obama have advocated providing federal assistance to troubled mortgage holders and their communities, with Sen. Clinton's proposal the more aggressive. The two Democratic candidates question why federal aid has been used to preserve assets of wealthy investors in Bear Stearns while denying homeowners in foreclosure equivalent relief. Of the three main presidential candidates, Sen. Hillary Clinton is the most interventionist, both with regard to the Fed bailout of Bear Stearns (Sen. Obama has questions about it) and the desirability of further help to homeowners in default.

Congress is meanwhile not waiting for movement in or to the White House. It is going forward on two fronts:

1. Assembling Data on What Exactly Happened in the Bear Stearns Crisis and Bailout. As reported by Bloomberg yesterday, Senate Banking Committee Chairman Christopher Dodd has asked Fed Chairman Ben Bernanke, Bear Stearns CEO Alan Schwartz, JPMorgan CEO Jamie Dimon, SEC Chairman Christopher Cox and Treasury Secretary Hank Paulson to testify on the Bears Stearns bailout at hearings on April 3. In a separate action, the Senate Finance Committee has requested information about the Bear Stearns acquisition to JP Morgan Chase. Finance Committee Chairman Max Baucus , D-Mont., and ranking minority member Charles E. Grassley R-Iowa sent letters asking about federal assets involved and names of the negotiators, lawyers and accountants.

2. Preparing to Overhaul the Financial Regulatory System. Sen Chuck Schumer (D-NY) has outlined this imperative in an op-ed in today’s Wall Street Journal. Sen. Schumer is darn right – the overhaul is long overdue. The non-bank financial institutions have become a de facto part of the financial system that is being protected by the Federal Government. The scope of the orderly markets objective that led to the creation of the Federal Reserve in 1913 must be correspondingly expanded to include investment banks. We don't want a financial system in which institutions can take on risk with a “heads we win, tails you lose” option.

A unified federal oversight body with broad institutional coverage is needed to monitor market-wide leverage and risk. A market-oriented approach could charge players premiums for the extra risk they bring to the marketplace via higher leverage. A regulatory approach could control leverage via Basle II-type capital-adequacy requirements as are being planned for banks.

Avoiding U.S. Fiscal Ruin - David Romer in 2007

Washington’s Out-of-Control Budgets - Notes on a Lecture by Prof. David Romer. (The following report is abbreviated with his permission from notes on the lecture taken by Bill Batt, staff political scientist in the New York State Assembly's Legislative Tax Study Commission, 1982-1992.)

On October 25, 2007, Scranton University held its 22nd Annual Henry George Lecture  and Romer was the Lecturer. [Henry George was a self-taught, widely read economist who favored taxing land rather than labor; he ran with labor support for the mayoralty of New York City in 1886, coming in second, ahead of Theodore Roosevelt, and again in 1897, dying at the height of the campaign. - JTM] The city of Scranton, Pa. itself was wild that day, as it played host to fans of the NBC hit serial, "The Office", set in Scranton. 

David H. Romer is the Herman Royer Professor of Political Economy at the University of California, Berkeley. He is a member of the American Economic Association Executive Committee, co-director of the Program in Monetary Economics at the National Bureau of Economic Research, and a member of the NBER Business Cycle Dating Committee – the so-called “wise men” who decide when national business cycles begin and end.

The lecture title was "Avoiding Fiscal Ruin: Failed Strategies and New Approaches to US Budget Policies." Professor Romer posed three questions: (1) How did we get here? (2) What are the likely consequences? and (3) What are some possible solutions? He showed simple PowerPoint bullets and graphics describing the past history and looming fiscal crises the nation faces in the next few decades:

History of the U.S. Budget

• The United States ran a small budget surplus throughout the years 1791-1929, except for support of the Civil War and World War I.
• The U.S. budget had an annual surplus in the early 1950s, and a deficit every year since then except for the final years of the Clinton administration.
• We are now running a $200 billion deficit, some 2 percent of GDP, which will grow enormously in the next two decades if most assumptions are borne out about health care, social security and other demographic trends. (He did not comment on the budgetary impact of the wars in Afghanistan and Iraq.)

The nation got into this position because we have in recent years stopped thinking of taxes and spending as going hand-in-hand. Moreover, beliefs about appropriate budget policy have changed. The prevailing view in the 1950s was that budgets should be in balance, at least averaged over a few years. Truman, in this regard, was a fiscal conservative, even though he favored government support of services. In the 1960s, a view took hold that balancing the budget was less important than maintaining economic growth. Hence deficits were sometimes necessary as a stimulus at certain points in the economic cycle. Nixon remarked, in 1971 [quoting Milton Friedman in 1965 - JTM], "we are all Keynesians now."

Reagan, in the 1980s, wanted to shrink government, as he believed that "government is the problem." It was possible, he argued, to do so according to a strategy of cutting back on domestic programs, called "starving the beast" [the original use of the term is attributed to David Stockman, Reagan's first budget director - JTM]. It followed to his adherents that cutting taxes would lead to a fall in government spending.

Cutting taxes doesn't have much impact on expenditure levels. Revenues, he argues, change for many reasons, and by tracing the history and motivation for tax changes, he has shown that the cause and effect relationships are very complex, and that correlation and causation should not be confused. He has looked at speeches, news conferences, reports, votes, and events such as wars and recessions, and concluded that it might even be that invoking "starve the beast" rhetoric actually leads to increases in tax and expenditure. Moreover, so many factors are involved in tax policy changes that there is typically shared fiscal responsibility – blame and credit for any policies are quite diffuse.

Problem. When the two sides, revenues and expenditures, are not viewed together it becomes difficult to focus policy. All indications are that U.S. taxes will soon need to increase, but little attention is being given to revenue designs.

With baby-boomers retiring, medical expenses increase, debt service increases, infrastructure renewal demands grow, and so on. Some leaders are already calling for such increases. But all the forecasts are necessarily based on existing law, which will need to be changed. The phase-out of tax measures in the year 2010 will lead to new initiatives, and these will call for new assumptions.

Likely Scenarios. Only three scenarios are possible:

1. Lower national saving, which will mean less reinvestment, slower growth and a lower standard of living.
2. A national economic crisis in anticipation of what is in reality a "Ponzi scheme".
3. Pay off the debt, either by raising taxes or printing more dollars. His comparison with past experiences in nations in Latin America was not lost on the audience. Nor did he see the United States abandoning care for its elderly.

Solutions. Professor Romer argues that we need to:

• Educate the public to a level where a solution is politically possible. He said that we need to link taxes and spending together once again as was the case prior to the 1960s. The political appetite for such policies are not presently on the horizon, but he suggested that perhaps some kind of "mutual disarmament pact" could be devised such as was set up earlier to address the Social Security crisis in the 1980s, and as exists now for closing military bases.
• Improve accounting practices by the federal government and for the U.S. economy.
• Introduce strong "pay as you go" rules such as were attempted in the Gramm-Rudman approach two decades ago.
• More radically, introduce a stringently fashioned "balanced-budget amendment."
• In addition, or alternatively, create a separate agency, comparable perhaps to the Federal Reserve System, that would be granted powers to impose fiscal and budgetary requirements.

Professor Romer was not sanguine that any solution was within sight, even though we are on a "potentially ruinous fiscal path." He argued that we need to contemplate major changes to address the problem.