Credit: NewsBreaker

On Thursday evening, an Interstate 5 bridge over the Skagit River in Washington state collapsed, sending two cars into the water and injuring three people. So far no fatalities have been reported. Authorities don’t yet know what caused the collapse.

Another bridge also collapsed in Texas on Thursday after catching fire. The fire burned too hot for firefighters to put out, so they let it burn. It was a railway bridge over the Colorado river and repairing it could cost $10 million.

The bridge in Washington was listed as “functionally obsolete,” which does not mean it was considered structurally deficient or unsafe, but rather that it was built to standards that are no longer used and may have had inadequate lane widths or vertical clearance. As Yahoo! News reported, the bridge was built in 1955 and had a sufficiency rating of 57.4 out of 100, “well below the statewide average rating of 80.”

Unfortunately, these bridge collapses are not isolated incidents. There are 759 bridges in the state that have a lower sufficiency rating than the one that fell apart. More than 350 bridges in Washington are considered structurally deficient, meaning they require repair or replacement of a component, although are not necessarily considered in danger of collapse. More than 1,500 are considered functionally obsolete.

Overall, one in nine of the country’s bridges are rated structurally deficient by the American Society of Civil Engineer’s yearly report card in American infrastructure. The average age for the nation’s bridges is 42 years. This netted the country a C+ rating on its bridges, which is mediocre. To upgrade all of the deficient ones, the U.S. would need to invest $20.5 billion annually.

Yet only $12.8 billion is being spent on bridge updates currently. The country’s infrastructure only got a total grade of D+, a poor rating. Overall, the country needs to spend $3.6 trillion by 2020 to bring it into the 21st century.

Investment, however, has been moving in the opposite direction. Public spending on infrastructure as a percentage of GDP has dropped dramatically in recent years, falling to the lowest level in two decades, as Joe Weisenthal pointed out. The U.S. is only expected to spend about a third of what the report card calls for by 2020.

While the American Recovery and Reinvestment Act, or 2009 stimulus bill, made infrastructure improvements, that money has mostly been used up. But as that package of spending proved, investment in infrastructure not only upgrades roads and bridges to make them safer, it also puts people back to work and helps improve the economy.

President Obama has proposed further stimulus spending on infrastructure, but his proposals have been repeatedly blocked by Republicans in Congress. Yet America’s borrowing costs are extremely low and deficits are shrinking, so there is no time like the present to invest in upgrading our infrastructure.

It hasn’t really made the front pages, but the United States recently began carrying out a massive and nearly unprecedented economic experiment, and 2013 looks to be the year when the results come in. The question is straightforward: When the economy is in a deep slump, and the government makes things worse by cutting spending, how much can monetary policy do to help? The answer could reshape the way we argue about economic policy, with profound implications for progressives’ economic priorities — and big opportunities, if they can seize them.

First, a quick refresher. Just like blood carries nutrients to the cells of the body, enabling them to function, the flow of money through an economy enables people to keep buying, selling, and earning incomes. Keeping the supply of money in line with the economy’s changing needs is the job of the Federal Reserve, and normally it does so by adjusting interest rates. Raising them sucks money out of the economy and reins in inflation. Cutting them pumps money into the economy, boosting wages and job growth. And most of the time, most economists agree this is the primary tool for guiding the economy out of its periodic slumps.

But with the 2008 crash the United States entered largely uncharted economic waters, and that agreement blew apart. That’s because the Great Recession was so deep that cutting interest rates all the way to zero still wasn’t enough to boost the economy into a recovery. Economists call it the “zero lower bound.” And while it’s a wall that modern western economies don’t hit often, 2013 will be the fifth year running the United States has been up against it.

So far, progressives have tended to side with economists like Paul Krugman and bloggers like Mike Konczal. They argue that monetary policy is severely weakened at the zero lower bound, when government must take over the job of pumping money into the economy by borrowing and spending. They point out that economic growth was a measly 2.5 percent for 2013’s first quarter, and market data suggests the Fed has failed to convince anyone it’s willing to let inflation get unusually high before it hits the brakes. This despite multiple rounds of “quantitative easing,” an attempt by the Fed to get around the zero lower bound by purchasing huge numbers of financial instruments, thus injecting money into the economy

But economists like David Beckworth and Scott Sumner countered that the economy’s 2.5 percent growth rate stuck around despite blows from multiple rounds of spending cuts, the European crisis, and worries about China. In fact, as Beckworth pointed out, government spending began shrinking by the start of 2010 — yet the economy just kept puttering along at 2.5 percent.

Other points in Beckworth and Sumner’s favor: Before sequestration, the latest round of across-the-board spending cuts, began, the group Macroeconomic Advisors projected growth for the first quarter below 2.5 percent if sequestration didn’t happen. Then the May 3 jobs report, which came out after Konczal’s piece, was so good it was almost shocking. Matt Yglesias and Ryan Avent, two other fans of monetary policy’s salutary effects, pointed to other data sources that suggest the Fed actually has been able to raise long-term inflation expectations.

So this looks like at least a preliminary win for team monetary policy. Granted, the evidence is also very preliminary. Getting economic data in real time is tough, and the full force of sequestration still hasn’t hit. So at a minimum, we won’t have a better idea until at least the second half of this year. But there’s a real possibility monetary policy has put a floor under economic growth — despite the government’s demented insistence on spending cuts and sequestration — and might even be able to do more if the Fed gets more ambitious.

So what if QE3 continues apace, sequestration remains in effect, and economic growth just keeps chugging along around 2.5 percent? What should our take-away be?

Well, Beckworth and Sumner tend to be fans of austerity and small government, for obvious reasons: if fiscal drag can always be offset by monetary policy, why not cut away? But this logic can be turned on its head, because recessions drive up spending and drive down revenues, even when policy itself remains unchanged. Far more than the real-but-modest imbalance between tax and spending left by the Bush presidency, the 2008 crash is what drove the federal government deep into the red. Employment and incomes dropped, so tax receipts dried up. But more people became impoverished and unemployed, thus qualifying for safety net programs, meaning spending automatically increased. Conversely, nothing balances a budget like economic growth. If monetary policy really has the power to guide us back out of even the steepest recession, then that is the way to reduce deficits, not austerity.

Progressives need to make monetary policy something politicians have to answer for. The Fed’s policy is set by the 12 voting members of the Federal Open Market Committee (FOMC), seven of whom are appointed by the president and confirmed by the Senate. This process, and the views on monetary policy of the people who are appointed by it, deserves every bit as much scrutiny from activists, organizations, and politicians as Supreme Court nominations. Republicans and Tea Partiers have relentlessly warn of runaway inflation and denounced quantitative easing, even in the midst of the slump. But outside a rarified group of bloggers, there’s been no serious pushback from the left, or even any real sense that monetary policy is understood as a specific issue worth getting mad about.

Unfortunately, the other five voting members are not vetted by democratically elected officials, and are instead drawn from the Fed’s district banks. That means they come from a social and professional milieu likely to bias them in favor of the worldview of the financial industry, business owners, and the wealthy. Those groups all have vested interests in minimizing inflation while ignoring job growth.

Still, the Fed’s recent announcement — that quantitative easing will be open-ended, with an eye to getting unemployment below 6.5 percent, and allowing inflation to go as high as 2.5 percent — was step in the right direction. But the inflation threshold is too low. Arguably, 4 percent would better balance stable prices with the need for job growth. The Fed is also limiting its purchases to the same amount every month: $85 billion. It’s hinted it might start varying that based on how it reads the economy’s needs, and progressives should pressure it to do so. As Beckworth put it, buying the same amount every month is like putting the same amount of pressure on the gas pedal, no matter what sort of terrain you’re driving over.

Finally, we need a wholesale reform of the way the Fed does business, making the institution more accountable to the needs of everyday working Americans. The simplest way, as Matt Yglesias recommended, would be to cut the five un-appointed members out of the FOMC’s decision-making process. That, or find some other way to bring the entire board under direct accountability to elected officials.

The Fed’s mandate could use a touch up as well. Right now, it merely instructs that inflation be kept down, and employment be kept up. All the Fed’s actual targets are of its own devising, and it can change them as it sees fit. It’s not obvious when economic trends are above or below where the Fed wants them to be, or how it intends to move in response. So Fed watchers pour over its pronouncements in a recurring act of glorified tea leaf reading, parsing the statements for clues of intent or disagreement amongst the FOMC members.

The process is so absurdly vague that, as Konczal noted, the bursts of news from the FOMC’s internal divisions undermine the Fed’s ability to credibly promise sustained monetary stimulus. In the vacuum of certainty, economic players often assume the Fed will put the brakes on the economy as soon as inflation begins to tick up. (There’s that bias in favor of the wealthy again.) The Fed’s targets and its obligation to hit them should be explicitly given to it by law. That could be an explicit inflation target, or a nominal gross domestic product target — which combines the level of inflation and GDP growth — as Sumner and Beckworth have suggested.

Zooming back out to the big picture, the fact is that the political forces pushing for fiscal austerity are the same ones pushing for monetary austerity. Movement in progressives’ favor on one issue is likely to bleed into the other. So while Krugman was wrong to dismiss the case for monetary policy as quickly as he did, his final conclusion was right: we should be throwing every policy tool we’ve got at the economic slump.

It’s just that up until now, progressives haven’t been giving monetary policy the respect it deserves. 2013 is the year they should start.

Adam Smith, godfather of austerity

Ed. note: This is the second post in a TP Ideas symposium on Mark Blyth’s Austerity: The History of a Dangerous Idea. The first installment is here and the third installment is forthcoming. You can read our previous book symposium here.

Mark Blyth’s intellectual history of austerity should be required reading for all progressives -– and in particular, the center-left policy elites who run the country.  There are many good books out there on the origins and aftermath of the financial crisis and the intellectual collapse of neoliberal thought (John Cassidy’s How Markets Fail: The Logic of Economic Calamaties, Justin Fox’s The Myth of the Rational Market, and John Quiggin’s Zombie Economics: How Dead Ideas Still Walk Among Us being standout examples.)  But few books today provide the political context for how a long discredited idea such as austerity gained institutional and political traction in the aftermath of the global financial crisis to become the preferred course of action among leaders despite its manifest failures in producing economic growth and reducing debt.

Blyth provides a clear and digestible historical tour of the ideas behind austerity, defined as “a form of voluntary deflation in which the economy adjusts through the reduction of wages, prices, and public spending to restore competitiveness, which is (supposedly) best achieved by cutting states’ budget, debts, and deficits,” from John Locke and David Hume to Joseph Schumpeter and contemporary advocates of austerity in Germany and the U.S. He also provides some much needed spice and anger when describing how it all works. It’s rare to read a book on economics that distills centuries of neoclassical economics into these choice words about the upside-down morality of those who believed markets could do no wrong prior to the financial collapse: “[Adam] Smith’s invisible hand had just given the public the finger.”

Most importantly, Blyth’s analysis implicitly raises critical points about how the progressive left failed to coalesce around a single solution to the financial collapse in 2007-2008, thus paving the way for the advocates of austerity to turn a private sector banking failure into a “crisis” of public debt and spending after nations such as the U.S. and U.K. intervened to save their banks.

How did this work? Blyth explains:

Read more

Ed. note: This is the first post in a TP Ideas symposium on Mark Blyth’s Austerity: The History of a Dangerous Idea. A second and third installment are forthcoming. You can read our previous book symposium here.

Arguably, there is no greater obstacle to progressive change than the idea of austerity. Austerity dominates economic policy discussions in Europe, resulting in policies in country after country that ensure continued slow growth (or outright contraction) and high unemployment. These conditions have produced demoralized electorates that lack faith in all politicians, including those on the left, a cynicism that has only been deepened when left parties have attained power and failed to revive growth. In such an environment, progressive change is not possible and the left is reduced to purely defensive actions.

In the US, things are slightly better. Nevertheless, our economic policy discussions are still dominated by variants of austerity. The fiscal cliff deal at the beginning of this year slowed the economy and the sequestered spending cuts are slowing it more. Yet with unemployment still at 7.6 percent, growth projections for the year halved to 1.4 percent and the latest jobs report coming in at an anemic 88,000 jobs created, policy discussion continues to focus on the need to cut the deficit more (despite the fact it has already gone down dramatically) and solve a national debt “crisis” whose effects, if any, are many years away (and may never appear). Of course, such a focus precludes any progressive economic policies, including critically, spending programs that would help revive the economy and invest in our economic future.

How did we get into such a pickle?  Does the current mania for austerity make any sense whatsoever?  And could the recent discrediting of Carmen Reinhart’s and Kenneth Rogoff’s influential pro-austerity paper provide any hope for defusing this mania?  Mark Blyth’s timely new book, Austerity: The History of a Dangerous Idea, provides answers to these questions. They are not necessarily comforting ones.

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Over at the Huffington Post, Jared Bernstein points us to a recent pilot study examining the ideological and public policy preferences of the super wealthy. The findings might surprise you: the one percent, selfish as they are, endorse some sound economic ideas that Congress is afraid to touch.

The study, conducted by Benjamin Page and Jason Seawright at Northwestern University and Larry Bartels at Vanderbilt University, used a specialized database to identify members of the top one percent of American wealth-holders who might answer some basic questions about economic policy. Some of the results are not all that shocking. Compared to the public at large, the ultra rich are disproportionately conservative and Republican, far more active in politics, more obsessed with deficits and cuts to government programs, and more opposed to specific regulations and tax policies that cut into their bottom line.

Basically, they’re Mitt Romney and Paul Ryan rolled into one.

But unlike the 2012 GOP presidential ticket, the super-wealthy appear to broadly accept Keynesian economic policy ideas and even, in an abstract way, the idea that inequality is a problem (even though they aren’t all that willing to do something about it):

• Seventy-three percent of the wealthy in this study agreed that, “The government should run a deficit if necessary when the country is in a recession and is at war,” compared to the alternative idea that the “government should balance the budget even when the country is in a recession and is at war.” In contrast, only 31 percent of the general public agreed with this basic Keynesian idea.
• Sixty-five percent of the wealthy say they are “willing to pay more in taxes in order to reduce federal budget deficits,” compared to less than 4 in 10 regular Americans. However, as the study authors point out, there are limits to this openness to increased taxes: “Despite our wealthy respondents’ great concern about budget deficits, most did not favor increasing rates of the income tax or estate taxes even to the slightly higher levels that held during the Clinton administration.”  (Wealthy Americans are much more open to slashing Social Security, Medicare, and other social programs, however.)
• Roughly similar proportions of the wealthy and the general public agree that “differences in income in America are too large” (62 percent and 63 percent, respectively). But there are wide differences in opinion about government steps to redress this inequality. Americans overall are 3.5 times more likely than the wealthy to believe, “It is the responsibility of the government to reduce the differences in income between people with high incomes and those with low incomes” (46 percent vs. 13 percent). And while a majority of the general public (52 percent) believes, “Our government should redistribute wealth by heavy taxes on the rich,” less than one fifth of the wealthy (17 percent) hold similar views.

These data suggest that even though the wealthiest Americans remain strongly self-interested and averse to many progressive policy ideas, they may have more wisdom about macroeconomic policy and the effects of income stratification than the conservative leaders claiming to represent their interests in Congress.

The anti-austerity chorus is getting louder. On the heels of the International Monetary Fund’s warning to the U.S. against pursuing severe spending cuts and the European Union’s Economic and Monetary Affairs Commission indicating that it is moving away from the same, European Commission President Jose Manuel Barroso signaled that he’s in favor of shifting away from austerity:

“While I think this policy is fundamentally right, I think it has reached its limits,” Mr. Barroso said. “A policy to be successful not only has to be properly designed, it has to have the minimum of political and social support.” […]

In his speech, Mr. Barroso hinted that some countries could be given longer to get their budget deficit in line with EU rules, which ostensibly limit it to 3% of gross domestic product.

“Even if the policy of correcting deficit is fundamentally correct, we can always discuss fine-tuning of pace,” he said. He noted, however, that EU finance ministers would have to agree to any change in the timelines.

Voices outside of government have also chimed in: Bill Gross, founder of investment firm Pimco, criticized the idea that austerity in the United Kingdom and Europe would lead to growth and instead argued that they should be spending money. This all comes on top of a new study that poked holes in the seminal research that many austerity hawks had relied on to make their case.

Meanwhile, demand for eurozone government debt has lead to the lowest yields for Spanish and Italian bonds in more than two years. Lower borrowing costs add even more firepower to the argument that EU countries should switch the focus away from deficit reduction and toward stimulus spending to get their economies back on track.

The American Recovery and Reinvestment Act, the economic stimulus package signed into law by President Obama in 2009, improved America’s infrastructure, but the United States still needs a massive investment over the next seven years to keep its infrastructure up to date, according to a report card from the American Society of Civil Engineers.

The report gave American infrastructure a D+ grade, tying the 2001 grade as the highest the United States has ever received and an improvement from the D it received in 2009. But the U.S. also need substantial investments between now and 2020 to keep its infrastructure in good repair (a B grade), according to the report. The U.S., the report estimates, will spend roughly $1.6 trillion between now and 2020 on infrastructure investment, far short of the $3.6 trillion it needs to reach a B grade:

The stimulus bill helped turn around the American economy during the Great Recession in part because it included substantial investments into infrastructure projects. Obama proposed further infrastructure investments as part of the American Jobs Act in 2011, but that plan was repeatedly blocked by Republicans in both the House and the Senate. Other funding for infrastructure improvements has been put off or reduced because of budget cuts and deficit reduction efforts.

Still, with unemployment high and borrowing costs at historic lows, the United States could afford to boost its investments into infrastructure to close the gap the ASCE says exists at a cost to the federal government that is far lower now than it will be in the future. At the same time, those investments would provide a sizable boost to the American economy.

The United Kingdom’s breathless pursuit of austerity under Prime Minister David Cameron was aimed sparking economic growth and reducing deficits. Three years after the conservative government began its deficit reduction efforts, though, it has failed to do both. Britain is now on the brink of its third recession in four years and its economy is still smaller than it was when the Great Recession began.

Persistently high unemployment and that lack of economic growth — caused by fiscal contraction — have left the UK far short of its deficit reduction goals, as this chart from the Wall Street Journal shows:

In 2010, Cameron and finance minister George Osborne projected that their austerity package would by now have reduced deficits from 4.8 percent of the economy to just 1.9 percent. At the beginning of 2013, the deficit stood at 4.3 percent. Still, Osborne and Cameron remain committed to austerity, with Osborne telling the BBC last week, “You can’t get out of debt crisis by borrowing more and more.” But Britain doesn’t have a debt crisis — its borrowing costs are at historic lows. It has an unemployment and growth crisis that a growing number of economists are begging the conservative government to address.

That should be a lesson to lawmakers in the United States, which emerged from the Great Recession in better shape than its friends across the Atlantic because it chose to stimulate the economy instead of cutting spending. Congress is committed now to a similar path of deficit reduction, even though countries that have tried it have entered an austerity death spiral — as they attempt to reduce deficits, they instead reduce growth and inhibit their ability to reduce deficits. The U.S., like Britain, is nowhere near a debt crisis. Still, lawmakers are insistent on cutting spending, even though unemployment is still high, spending has plateaued, and fiscal contraction has already hampered America’s tepid economic recovery.

Few outlets have done more than Fox News to perpetuate the bizarre claim that the American Recovery and Reinvestment Act — popularly known as the stimulus — failed to help the economy or struggling American families. But this afternoon, both the network and anchor Trace Gallagher inadvertently wandered off the anti-stimulus script.

During a segment ostensibly aimed at debunking a video released by the California Teachers Union, which criticized the nation’s wealthy citizens by claiming they sucked up the majority of the assistance the government passed in response to the recession, Gallagher and the Fox News art team unloaded a barrage of ways the stimulus brought aid to lower and middle-class Americans at a critical time:

GALLAGHER: Of course, they failed to point out that of the $787 billion stimulus, more than $105 billion went toward education, $20 billion toward food stamps, $39 billion plus went to extending unemployment insurance benefits, and $25 billion went to extending health benefits for the unemployed. In fact that lion’s share of the stimulus went to those in lower and middle-class families.

Watch it:

The current economic consensus as expressed by the Congressional Budget Office holds that these sorts of programs aimed at assisting Americans lower down the economic ladder — especially food stamps and unemployment benefits — produce more job growth per dollar than any other form of government spending or tax cuts. There’s plenty of evidence that the stimulus gave a pronounced boost to the economy, helping to put a floor under the economic recession. The bulk of the studies and economic models done on the topic have come to the same conclusion.

Though the United Kingdom’s decision to slash government spending and temporarily hike taxes in response to the Great Recession sent the country tumbling into a double-dip recession, the Conservative government announced on Wednesday that it would extend austerity measures for an extra year. Chancellor of the Exchequer George Osborne informed Parliament that the government planned to end austerity in 2018 rather than 2017, claiming that “it’s taking time but the economy is heading in the right direction” amidst what the New York Times described as “heckling and laughter from some members of Parliament.”

Their derision might be because austerity has failed the United Kingdom, much as it has failed the broader Eurozone and, on the state level, severely held back the American recovery. An apples-to-apples comparison between the U.K. approach and American stimulus suggests that stimulus caused the U.S. to beat growth expectations and Britain to lag behind them.

Broader European austerity caused its GDP to shrink over the past five years while the U.S.’ grew by 2.9 percent. And had state governments not implemented their own austerity plans in the form of slashing government jobs, American growth would have been even more robust.

Moreover, austerity doesn’t even accomplish its stated goal of reducing a government’s debt. The European experience proves that austerity hurts growth more than it reduces government spending, meaning it actually increases debt-to-GDP ratio. Indeed, as a chart by the conservative UK Spectator shows, Britain now has the highest deficit of any Western country despite its sever budget cutting:

If Republican insistence on lower tax rates for the rich sends the U.S. tumbling over the fiscal cliff, our austerity measures will be more severe than Europe’s.