Why White House Burning Is Wrong, Liberal Edition

By James Kwak

Dean Baker, a leading economic commentator and author of the Beat the Press blog, has written a review of White House Burning for the Huffington Post. Baker manages the admirable feat of being gracious and complimentary while delivering several serious criticisms of the book.

I’ll skip over the nice things he said and get to Baker’s main objections, of which I think there are three. The first is that long-term fiscal sustainability is the wrong problem to be focused on:

 “While the solutions do not especially upset me, I do very much disagree with the diagnosis of the problem. The most immediate issue is that we have a fire at the moment in the form of too little demand leading to too much unemployment. This is wrecking the lives of millions of workers and their families.

“Johnson and Kwak understand this and certainly do not argue for deficit reduction in the short-term, but their focus on a longer-term deficit problem can be distracting from the more urgent problem.”

I certainly understand this unemployment-first attitude. For many people, especially Democrats, the political story of the past two years is that all of Washington focused on deficits instead of economic growth and jobs. The villain of the story is either conservatives for insisting that deficits must be addressed now or the Obama administration for going along with them. From a policy perspective, the position of most mainstream Democratic economists is this: fix unemployment first, then deal with the national debt.

In fact, I don’t disagree with this position. But I don’t think this should mean that everyone should only write books about unemployment because anything else is a distraction. In fact, I think the refusal of most progressives to say anything about the national debt (other than “Yes it’s a problem, but let’s worry about it later”) is a tactical mistake. It means that the spectrum of people talking about the national debt ranges from Tea Partiers on the right to self-proclaimed deficit hawks like the Gang of Six on the “left.”

When Paul Ryan pushes some hare-brained scheme to reduce the national debt (while slashing taxes for the rich), most Democrats point out that he’s a tool of the 1%—but they don’t have an alternative solution to what many Americans think is a major problem. One reason we wrote White House Burning was to show that one could take the national debt seriously while defending the current role of government in society, and that it is possible to address the debt problem without huge cutbacks to programs that the middle class relies on.

To be fair, Baker’s criticism is not simply that a book about the national debt is an unwelcome distraction. His next major point is that foreign purchases of dollar assets artificially increase the value of the dollar, creating a trade deficit, and so budget deficits are necessary to maintain employment:

“until we reduce the value of the dollar enough to get our trade deficit down to more normal levels, we will need large budget deficits to sustain high levels of employment. Rather than being a problem, the budget deficit is a solution to a problem created elsewhere.”

I’m not about to delve into international macro late at night and with new-baby brain (that will have to wait for another post), but I’m not entirely convinced. In 1999, for example, the trade deficit was 2.8% of GDP (BEA), the federal budget surplus was 1.4% of GDP (OMB), and real GDP grew at an annual rate of 4.8% (BEA). In 2011, the trade deficit was 3.8% of GDP. I know there are many differences between 1999 and 2011. But if a large budget surplus was consistent with rapid growth and low unemployment in 1999, it doesn’t seem obvious that a modestly larger trade deficit in 2011 would change that.

Baker’s third major criticism is that we “misdirect readers” on health care costs.

“At the end of the day, we cannot afford to pay for a broken health care system. This is not just an issue of public finances. We can’t have a health care system that costs 25-30 percent of GDP when everyone else gets comparable or better outcomes spending 10 percent of GDP.

“The projected run-up in private sector health care costs is every bit as much a cause for concern as the projected increase on the public side of the ledger.”

I completely agree with everything he says about health care costs. I think Baker’s criticism is that we talk about health care primarily in the context of federal health care spending instead of trying to solve the broader problem. To some extent, this is true, since we were writing a book about federal fiscal policy and the national debt, not about health care overall.

At the same time, I thought we made it clear that the health care problem goes beyond the federal government. This is from pages 132–33:

“As the largest buyer of health care in the economy, the government has some influence on overall health care prices, but that influence is limited. . . . While the cost of Medicare and Medicaid has been growing over the past few decades, the cost of health care that is not paid for by the government has been growing as fast as faster because it is subject to the same pressures: technological innovation and rising incomes. And without structural change, there is no reason to expect private health care costs to start falling. . . .

“Our health care problems are broader than our deficit problems. . . .

“The best solution would be one that reduces the long-term growth of health care costs for everyone, including the government.”

Later in the book we argue that reducing health care costs will require systemwide change:

“The best way to reduce spending is probably to shift toward new health care delivery models that make providers accountable for both costs and quality; this will give them the incentive to improve coordination, apply the lessons of comparative effectiveness research, and focus on outcomes rather than simply maximizing their revenues by supplying unnecessary services” (p. 196).

There are two reasons why we focus on federal health care spending. First, as mentioned above, this is a book about federal policy, not about health care in general; I don’t think we’re qualified to write the latter. Second, from a public policy perspective, federal policy is one of the biggest levers available to change the behavior of the private health care system. Most providers take Medicare patients, and Medicare has been a major driver of change in the industry, for better and for worse.

The big problem we face, in my opinion, is that no one really knows how to bring health care costs under control (short of single payer, which would work but is a political non-starter). The current budget policy fad (Domenici-Rivlin, Bowles-Simpson, Ryan-Wyden, etc.) is to set an arbitrary cap on government health care spending. That, however, would simply shift costs onto individuals, which does Americans in the aggregate no good.

Our approach can be summarized as follows:

  1. It would be great if we could figure out how to reduce health care costs across the economy. We should try to do that. But given all the health care experts out there, Simon and I aren’t going to come up with a magic bullet.
  2. So from a budget standpoint, we have to be prepared for a world in which health care costs continue to rise. To avoid simply shifting costs onto individuals, we have to find a way to pay for those costs. And we can.

32 responses to “Why White House Burning Is Wrong, Liberal Edition

  1. Wingnut propaganda and disinformation. We witness the markets recognizing basic math and giving up a few basis points last week – and the Ben comes out with some happy news today and the markets move in irrationally exhuborant ways. The entire market is a Ponzi scheme, buttressed and manipulated by Fed largess, printing money out of the must and funneling it into the offshore accounts of the predatorclass den of vipers and thieves in the finance sector. The markets are manipulated by central banks printingpresses. Themany, the people are ruthlessly oppressed and dominated, so predatorclass, the few can be enriched, and advantaged, Wear a hoody – you could be killed by state agents or contractors, bad credit – good luck on that loan! Get caught with a little pot- and prison awaits you.

    Ontheitherhand – rob and pillage the old, the poor, children – conduct systemic fraud and forgery – tank the global financial system with and through criminal Ponzi schemes, tax evasion, systemic fraud, collusion, insider trading and other acts of skullduggery – bribe and purchase the socalled government and regulatory apparatus’ – shred that godamn piece of paper formally known as the Constitution – and all is forgiven. All is well. And further – charge the terrible cost to the taxpayer.

    We inhabit a fascist state! It is our right and moral duty to “alter and abolish” the current panjandrum. Burn it down – reset!

    It’s our only hope!!!

  2. “The big problem we face, in my opinion, is that no one really knows how to bring health care costs under control (short of single payer, which would work but is a political non-starter.”

    What a bunch of cowardice and ca ca!!!! The The solution is SOCIALISTA healthcare wherein the government gaurantees some basic healthcare to EVERY human being!! This would offer true competition to the den of viperes and thieves in the healthcare, phararmcuetical, socalled insurance oligarchs!!!

    Our enemies walk amongst us!!!!

    Destroy them!

  3. Mr Kwak writes:
    “The big problem we face, in my opinion, is that no one really knows how to bring health care costs under control (short of single payer, which would work but is a political non-starter). ”
    He, and others, might be interested to know: for three
    weeks, in September 2009, I took a break from my two-hours-
    per-weekend selling of “NO AFGHAN WAR” buttons, to selling
    “SINGLE PAYER” buttons. In the six hours I spent, I brought
    in $240, which is $40 an hour. In other words, the “SINGLE
    PAYER” buttons sold like hot-cakes, and there was no
    pushback from any antagonist.

    So it seems to me that a campaign for Single Payer,
    mounted by the people(me and others) might persuade
    politicians to pay a little more attention to the people, and
    less to the health insurance and pharmaceutical industries.
    However, I drew my success to the attention of Margaret
    Flowers and a couple of other PNHP honchos, but didn’t
    succeed in persuading them also to Get Out on the Street
    and push a political movement.

    Best wishes,

    Alan McConnell, in Silver Spring MD

  4. yea, I don’t see how you can argue with what Dean Baker is saying really.. the debt problem is not a complicated one, but the solutions appear to be politically impossible, which is pretty sad. So, why should we bother arguing about the obvious, we spend as much on defense as the rest of the world combined, and our private health insurance system costs about twice as much as any comparable system around the world. If you’re not going to have the balls to say yes we need a single-payer system, or that we need to reduce defense spending to a sane level, then whats the point of writing a book that focuses on the deficit while ignoring the more immediate questions of creating growth and jobs?

  5. So you got dissed by a debt dove… big deal. Just be glad Warren Mosler or Rodger Mitchell didn’t take an axe to your book.

    http://www.moslereconomics.com
    rodgermmitchell.wordpress.com

  6. FIAT $$$$ and fractional reserve banking and Ponzi schemes – gee, what could go wrong there?

    When any currency to conduct commerce is issued as *debt* that needs to be repaid with MORE debt, where the hell do you think we’re going?

  7. Eclectic Obsvr

    Seems to me that while you agree with him-Dean Baker- in general, that you still write about – in essence– the wrong problem. You don’t have to agree with Dean Baker’s policy prescriptions to look at the issue with the economy akin with someone who’s house is burning down but also needs to fix some leaky plumbing. Which would I concentrate on?

    Also, while I do agree that debt and deficits are worthy of concern, I also have heard Casandra talk on that subject for most of adult life.

  8. Daniel Barkalow

    It looks to me like we’re actually doing the right thing at present with respect to unemployment. Not that unemployment has stopped being a problem, but we just have to keep doing what we’re doing. I think that long-term deficit reduction plans are actually the right area to focus on, in order to relieve the pressure to change current spending levels. The current situation is that we’ll continue with emergency spending indefinitely (under the assumption that major automatic disruptions get postponed repeatedly). We need a plan that automatically phases out these measures as they become less important, so that reasonable projections are stable in the long run, so that we have something to say to people who threaten short-term stability in order to limit the long-term debt. The fire department is here; we need to be talking to the water department about our leaky pipes so they don’t shut off the water to the hydrant.

  9. There exists strong pressure at the federal level to curtail employment, as is true in many states. Attempts to limit excess spending on employment in the guise of austerity or deficit reduction will have the exact opposite set of consequences being pushed by the austerity ghouls. Less discretionary spending by separated employees will keep demand for goods and services depressed. Keeping people in their jobs is far more crucial that cutting the deficit at this point.

    As another commenter noted above, the entire proposition is outlandish when money issued as debt is behind the multivariate fiasco
    that has seen most of the dollar disappear since 1913 through the hidden tax of inflation. These cartels generate the misery, and the mis-deeds, so they belong in Hell, with the devil.

    Finally, expect more intense attacks on organized labor, since this bloc is the final bastion between the GREEDY BASTARDS, and those of us trying our best to maintain a middle class existence.

    That the people of Wisconsin managed to obtain over one million signatures relating to the Paul Ryan RECALL that is on the calendar, is certainly encouraging.

    Good will triumph, as the number and skill level of angels serving this principle have all the advantage over those seeking domination from the dark side.

  10. Ah yes …

    The inestimable and feisty Dr. McConnell has returned with his sagely prescription for the Murican health care woes.

    Glad to see he posted :)

  11. Finally, I have found a blog that recognizes that debt is an issue that transcends ideological boundaries. It is as if Ronald Reagan planted the conservative flag atop the deficit mountain by proclaiming all Democrats as “tax and spend liberals”, simultaneously castigating taxes, spending, and (gasp) liberals. The Democratic Party and the left have never effectively countered this ploy and in fact, continue to cede ground on this issue. As a fiscally conservative socialist, I am glad I finally have a home

  12. We could provide universal healthcare, some basic government funded healthcare option which would demand real competition in the healthcareprovider industrial complexes and provide better healthcare services to a much wider swath of the a American population.

    In the end oligarchs, pharmaceutical, healthcare providers, and insurance would suffer losses and real competition, which the DO NOT want and will not tolerate – so we will be forced to endure the status quo, and unending profiteering and criminal enterprises from the ruling oligarchs!

    Our enemies walk amongst us! Destroy them! It is our only hope!

  13. Except for health care and the cost of military hardware (e.g. fighter jets), I don’t understand the focus on the debt because it seems clear to me that the U.S. has the ability to solve its debt problem by raising taxes. Deficits are only an issue if you assume that tax-cutting hysteria will continue indefinitely, and if that is is the case, the U.S. is finished regardless of what else it does. So what’s the problem? Just go back to the pre-Reagan marginal tax rates, and get rid of the special treatment of gambling (aka finance) earnings.

    Clearly we need single payer health care to bring down costs to the level of the rest of the first world. As for the cost of fighter jets, I think the answer is obvious.

  14. James Kwak,

    at the risk of being tangential

    Dean alluded to what appears to have been your endorsement of raising the retirement age.

    I hope this is an error. I read your essay on Social Security and was pleased as well as surprised that you see SS essentially the way I see it.

    But if you think raising the retirement age is a solution, you haven’t thought about it enough.

    Raising the age would be cruel to most workers.. not just those with “hard physical jobs.” After forty years of working for someone else most workers are desperate to quit. They have earned the right, and moreover THEY HAVE PAID FOR IT.

    Or could easily have paid for it if they were given the choice. A raise in the payroll tax of one half of one tenth of one percent per year… about forty cents per week in todays terms… would entirely close the actuarial shortfall in the Trustees projections.

    I won’t expand on this here. But you need to think it through.

  15. Here’s some interesting push back:

    IRELAND FACES LEGAL CHALLENGE ON BANK BAILOUT

    David Hall … argued that the government’s decision to issue the 31 billion euros of promissory notes violated the constitution as it failed to secure parliamentary approval … Senior Counsel John Rogers, a former attorney general of Ireland, is representing Hall.

    http://www.reuters.com/article/2012/03/26/ireland-debt-court-idUSL6E8EQ7HL20120326

  16. Off topic but …

    Here in Canada inflation has been at about 2% … or 6% in total for the past three years. In Vancouver British Columbia (where I live) inflation in the real estate market has been about 30% for the past three years.

    $250,000 will — not buy you a 400 sf shoebox — that is 30 – 50 years old. We had (?) a leaky condo crisis from 1982 to 2000. That means people are living in “rotting” bldgs that should be torn down but they have nowhere to go and they are trying to off load them right now because the gubmint has made depreciation reports mandatory by December 2012.

    In the mean time there is a bldg boom in the suburbs. Someone told me 200 builders from Ireland are headed here for the jobs in the construction industry. 100s of new condo projects underway. Developers are building for a 25 year life cycle. That means once your mortgage is paid off the bldg is a write off. They used to build homes to last but now its designed obsolescence. You get to buy a lemon that could be a dust heap in 25 years.

    Irrational euphoria under way here.

  17. PhilPerspective

    James:
    You forget one thing. When was the deficit ever an issue when W. was President? Why is it only an issue when a Democrat is in the WH, or Democrats have control of the WH and both legislative branches?

  18. JK may have scored a winning point in his “rebuttal” to Dean Baker’s graciously-worded criticism of White House Burning.

    JK writes: —- I think the refusal of most progressives to say anything about the national debt … is a tactical mistake. It means that the spectrum of people talking about the national debt ranges from Tea Partiers on the right to self-proclaimed deficit hawks like the Gang of Six on the “left.”

    As for Dean Baker’s reaction to hearing Simon Johnson on the Bill Moyer Show. I too watched this interview and was “shocked” by the degree to which Simon was willing to speak his truth. In another time and / or country Simon would be discredited, locked up, or assassinated for taking the stand he is taking.

  19. @tippy – interesting information, thanks for sharing.

    By 2037, the world’s projected population, based on the trajectory of today, will be about 8.8 Billion. So finding building materials programmed to self destruct after the mortgage is payed off will be a whole different ballgame.

    Also, the global economy musical chairs music stops when the FINITE fuel source that is shipping cheap junk and narcotics and slaves hither and dither is depleted.

    So might as well stop the insanity now and start erecting advanced, sustainable (and how about beautiful, for a change) architecture that is built to last…and here’s something radical enough to get me in trouble :-)), the builders get to own a piece of what they built for their progeny…

  20. Thanks Annie,

    Interesting point. Hadn’t thought about the world running out of bldg materials. Yep, we need to keep the conveyor belt going to the land fill. It’s called economic growth to keep the GDP up.

    I went to a talk by a developer and he said that the construction industry is now building to a 25 year life cycle which was not the case when he started and he is not happy about this.

    Maybe people should stop buying homes and start co-ops to build homes that are made to last at least a generation or more.

  21. Did a bit of number crunching. Inflation in the real estate market might actually be closer to 20% each year for the past three years in the City of Vancouver.

    The same unit listed in 2009 for $210K is listed in 2012 at $330K.

    Just ridiculous.

  22. $330K for a 425 sf shoe box !!

    GGGGRRRRrrrrrrrrr

  23. No one has the data, as I keep saying, on which to make sweeping health care policies that address the real needs of real people – to wit:

    http://www.cnbc.com/id/46882434

    And guess who has been advertising themselves as being involved, in some fashion, in MOST of the oncology studies this past decade – a *Bain* creation called “Quintiles”…

    Homeless and without health care – for the masses – the *service* economy coming to a country near you soon…

  24. I can’t stop laughing at this one – good way to end the work day – LOLOLOL

    http://www.huffingtonpost.com/2012/03/28/bundesbank-women-risk-taking_n_1385100.html?ref=business

  25. Mr. Kwak is very reasonable, as always. But why is the book called White House Burning? The title and the subtitle of the book are very provocative. It may increase sales, but also give a torch to the folks bent on incendiary actions, like the modern republicans. Words matter.

  26. Dilly dally all you want. You people imagine that we operate in a world of logic and justice, enforced by leaders of conscience beholden to the ruleoflaw. Idiots.

    None of this is true. We are ruthlessly oppressed by fascists and tyrants, ghouls fiends, a den of vipers and thieves. Our leaders are monsters seeking the enslavement or eradication of the population.

    There is no hope in fixing these horrorshows!
    There is no ruleoflaw, and no socalled justice!
    There are no wise compassionate leaders!
    There is no balm in Gilead!
    There is only the ruthless monsters in the predatorclass and everyone else.

    It’s kill or be killed.

    That is the only law going toward,

    It’s us or them biiiiiiaaatches!

  27. To Tony, you say “its us or them” only flaw in your thought is “they” have the weapons & tactics to quell any uprising quickly. One comontator claims that after the success of Egyptians to overthrow their government our beloved NSA implemented a program to monitor & “jam” cell phones & social media if an uprising of that sort happens here. I say the only way to defeat facists is how Ghandi did it in India, the 99% just stop obeying and more importantly “paying” them.

    If Catholic women(and their partners) who use contraception told the Catholic Chuch to change its policy or they will leave the Church, If vast numbers of mortgage holders just stopped sending their payments to BOA, if vast numbers of us parked our cars for a month, refused to buy doritos, or budweiser.

    I am in the process of applying for financial aid to send my only child to college. Funny, all offers so far from Public or Private schools seem to leave us with about $10,000 a year we have to borrow. Name another sector of our economy as fat & lazy as higher education. Every year they get their automatic raises & tenure & righteous indifference to the plight of the 99% and we the consumers just borrow more to fund their cozy nest. What if everyone just took a year off from college, EVERYONE?

  28. “No one really knows how to bring health care costs under control (short of single payer, which would work but is a political non-starter).”

    What does one say to a nation where this passes as political discourse or worse, as policy discussion? Why should one even bother.

    Right.

  29. Frank Arcoleo

    James,

    I’ve just been notified by Barnes & Noble that my copy of “White House Burning” is on the way! But even before I get to read it, I felt I needed to jump in to your response to Dean Baker’s criticism. I understand how some of the criticisms are a bit off the mark via the intent of the book. But I believe that he has exposed something in his second criticism that is absolutely essential and that you don’t seem to have appreciated significantly.

    New-baby brain or not, international macro must be addressed. Given that real income for the bottom 90%+ of Americans stagnated or actually decreased for the 30+ years since 1980, one wonders where the hell all the GDP growth came from. It could not come solely from the tremendous gains of the top 1% (or even the top 10%). GDP growth came from (1) more spouses working; (2) people working more hours (and more jobs); and (3) finally, and most unfortunately for things since 2008, borrowing. That’s the only way that we can have domestic GDP growth with a serious trade deficit. Borrowing by individuals kept growth and low unemployment going for years. Borrowing by the government is now jumping into the gap to keep demand from falling to depression levels. But the truth is that with the trade deficit, increasing borrowing by somebody is ABSOLUTELY REQUIRED to keep GDP growing.

    You saw what too much borrowing by households can cause — the Great Recession. Eventually (not real soon, but not so terribly far out there, either), too much borrowing by government would cause a different kind of disaster, but a disaster nonetheless. So the real culprit, the one which we continue to ignore, is the terrible imbalance in trade caused by an exchange rate that is out of balance. If we don’t fix that, I don’t see how we can fix anything.

  30. Frank

    you might want to read J.K.Galbraith “Money”. lt’s an old book. toward the end of it he discusses some relations between balance of trade and money policy. if you are an economist you probably know all this already. but then you wouldn’t care for what Galbraith thinks of economists.

  31. Maybe nobody knows how to rein in health care costs. But Harvard Business School innovation guru Clayton Christensen has taken a good whack at the problem with his book “The Innovator’s Prescription” (written with 2 medical professionals). As he puts it, we are asking the wrong question. Instead of “How can we afford health care?” we need to ask “How can we make health care affordable?”
    In any case, if anybody’s ideas deserve attention, his do.
    (Interestingly, in a Business Week column, Christensen explained why, in health care, innovation and competition actually act to drive prices up, not down—contrary to “free market” dogma.)

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