Sharers, Takers, Carers, Makers

Nancy Folbre is an economics professor at the University of Massachusetts, Amherst. She recently edited and contributed to “For Love and Money: Care Provision in the United States.“

Some of the most vivid political rhetoric of 2012 reflects a debate that has lasted centuries. Who are the makers and who are the takers? Much economic theo ry revolves around efforts to distinguish the two. The conceptual effort is motivated by noble intent: presumably, a good economic system encourages making (creating more to go around) and discourages taking (redistributing what others have made).

Yet it is surprisingly hard to create a consensus about these labels, and past disagreements, still unresolved, lurk in the background. History is shaped by contending claims over who is more productive than whom. Powerful groups like to describe themselves as makers rather than takers, partly to glorify themselves and partly to discourage take-backs.

Some ambiguity derives from our basic relationship to nature. Humans started out as takers, not makers, hunting and foraging for food. Even in the harvesting of crops, back-breaking labor counts for little compared with the gifts of soil, sunshine and rain. Modern economic systems still largely rely on fossil fuels, gifts from the past.

Because we don't have to barga in or trade directly with nature, we don't consider it a participant in our economic system. Rather, we compete with other humans for access to nature's bounty. In the competition for territory, resources and political power, taking has proved as indispensable to economic success â€" if not more so â€" than making.

Think of feudal lords, who believed they earned the right to demand obeisance from their serfs because they offered protection from the depredations of other lords. A protection racket, in many respects, but as Jared Diamond persuasively asserts in “Guns, Germs and Steel,” Europe's military prowess, honed by internecine wars, enabled an imperial expansion that worked to its economic advantage.

When John Locke laid the conceptual foundations of liberal democracy in the 17th century, he contended that a system that guaranteed men rights over the product of their own labor (including wild apples picked from a tree) would always prevail over a system based on arbitrary authority, like feudal dues or taxation without representation.

He excluded women from his theory, assuming that childbearing and family care were not forms of labor, but like apples, gifts of nature (until picked by men). Classical political economy, from Adam Smith to Karl Marx, presumed that women's domestic labor was “unproductive” even if it was performed by paid servants.

Over the course of the 19th century, wives and mothers who worked long hours in the home rather than earning wages came to be described as “dependents” who were “su pported” by their husbands, a description that early feminists fiercely challenged.

In debates over welfare reform in the 1990s, most Republicans and Democrats alike dismissed the idea that a “work requirement” could be met by anything but paid employment. Last April, however, conservatives rallied to the point of view that stay-at-home mothers are makers, rather than takers, challenging a Democratic strategist's accusation that Ann Romney “never worked a day in her life.”

That particular argument was superseded by Mitt Romney's assertion that members of families who paid no federal income taxes were all takers rather than make rs. In the wake of the presidential election, he went on to suggest that President Obama was a winner only because he was a “giver,” redistributing income away from the makers to the takers.

Conservatives tend to describe government employees as unproductive, a legacy of the late 19th century Austrian school of economics, popularized by the writer Ayn Rand. Even those who emphasize the blurry line between making and taking, like the economist Tyler Cowen, seem convinced that “taking” is to the public sector as “making” is to the private sector.

But as the term “taking profits” implies, some private-sector income is based on speculation, rather than actual production. In the long run, standard economic theory predicts that profits, above and beyond returns to skill, entrepreneurship and the costs of capital, should attract new entrants into an industry, pushing profits toward zero in competitive markets.

Instead, the share of profits relative to wages has been increasing in both the United States and other affluent countries, not because workers are becoming less productive, but because technological change, deregulation and globalization have made it easier for owners to keep wages low. Increases in monopoly power may also hel p explain the rising profit share.

In sum, being a taker is not a sign of economic failure, and being a maker is no guarantee of economic success. Taking is not confined to the public sector, and making is not confined to the market economy.

Our own life cycles show us that taking and making often alternate in rhythm. We all start out dependent on the care of others, and many of us end that way as well. In between we hope to make a living not just for ourselves, but for others: those who made our past and those who will make our future.

A good economic system rests on sharing and caring as much as, if not more than, taking and making. Ever wonder why the first part usually gets left out of the story?

The S.E.C. at a Turning Point

Simon Johnson is the Ronald A. Kurtz Professor of Entrepreneurship at the M.I.T. Sloan School of Management and co-author of “White House Burning: The Founding Fathers, Our National Debt, and Why It Matters to You.”

The job of head of enforcement at the Securities and Exchange Commission is now open. The Obama administration should press for the appointment of Neil Barofsky, former special inspector general for the Troubled Asset Relief Program, to this position. Unfortunately, the administration has given no indication it will do so, leaving the impression that it is likely to be business as usual for the next four years, with regulators who are less than tough on the industry.

(I have al so endorsed Mr. Barofsky as a chairman of the S.E.C.; clearly, I want him at the commission one way or another.)

The departing director of the division of enforcement at the S.E.C. is Robert Khuzami, a former general counsel for the Americas at Deutsche Bank, a job he held from 2004 through early 2009. Although Mr. Khuzami was once a distinguished prosecutor, his appointment to the S.E.C. turned out to be a mistake because Deutsche Bank was so deeply involved in the securitization morass that led to the financial crisis of 2008.

(For more details, I recommend this Web page, with information collated by UniteHere, a trade union. You should also read this assessment by Yves Smith on her nakedcapitalism blog.)

Mr. Khuzami has vigorously defended his record and insisted it would have been “unwise” to press Wall Street firms and their executives for admissions of guilt. Whether the S.E.C. failed to prosecute the executives who made the key decisions because it had no case or because of Mr. Khuzami's views, we may never know.

In addition, concerns continue to grow regarding the extent of mismanagement and illegal activity at Deutsche Bank during Mr. Khuzami's time there; Mr. Khuzami has recused himself from the latest S.E.C. investigations.

According to Jordan Thomas, a lawyer representing one of the whistleblowers from Deutsche Bank, as quoted in the Financial Times,

During the financial crisis, many financial institutions faced an existential threat and the evidence suggests that Deutsche Bank crossed the line by substantially inflating the value of its credit derivatives portfolio â€" the largest risk area in its trading book.

This is precisely the kind of complex case that requires a skilled prosecutor with detailed knowledge of how the industry works. At the same time, it cannot be someone who has worked for a major financial institution either directly or as its outside counsel. The potential for a perceived conflict of interest is too great.

In the past, we would have looked to the United States Attorney's Office for the Southern District of New York for the right kind of talent. But in the last few years this office has focused much more on insider-trading cases, with much of its evidence collected through wiretaps. The human capital that is capable of directly prosec uting and winning complicated securities fraud cases is much depleted.

Fortunately, Mr. Barofsky is at hand and is an excellent choice for head of enforcement at the S.E.C. (though surely not the only one so qualified). A career prosecutor who worked for the United States Attorney's Office in a previous era (through 2008), Mr. Barofsky successfully pursued mortgage fraud cases and complex securities fraud and accounting fraud cases, including against the most senior executives of the former commodities giant Refco. He also worked on drug-trafficking cases, going up against some of the most dangerous criminals in the world.

In the fall of 2008, Mr. Barofsky, a Democrat, was nominated by the Bush administration to become the independent lawyer inside the Treasury Department (special inspector general, in Washington parlance) responsible for supervising the implementation of the divisive Troubled Asset Relief Program, or TARP. He was confirmed with bipartisan suppor t and continued to enjoy such support until he stepped down in early 2011.

At TARP, Mr. Barofsky investigated and studied carefully almost every corner of the financial system, with the goal of preventing fraud and abuse in the use of taxpayer money. He prosecuted people who broke the rules and who were trying to steal from the government (and from you).

Remarkably, Mr. Barofsky had to contend with initial resistance from the Treasury team led by the secretary, Henry M. Paulson Jr. The extent and sophistication of resistance to Mr. Barofsky's sensible compliance recommendations increased dramatically once Timothy F. Geithner was confirmed as Treasury secretary.

The Treasury philosophy was that all of its financial stability policies were intended to “foam the runway” for banks â€" making it easier for them to earn their way out of the crisis. The Obama administration's much-hyped mortgage-modification program, for example, was designed and implemented i n ways that were always going to be harmful to many homeowners, a point that Mr. Barofsky and his team made before, during and after this became painfully evident to the rest of us.

Mr. Barofsky understands the details and knows how to build an office that combines effectiveness and integrity with its own investigative capability. His reports will long stand out as beacons of clarity. (The TARP special inspector general reports are on the Web; the Barofsky reports are from February 2009 through January 2011.)

Another advantage to Mr. Barofsky's appointment is that we would not have to fear that he would later rotate into a senior position on Wall Street. As he made abundantly clear in “Bailout: An Inside Account of How Washington Abandoned Main Street While Rescuing Wall Street,” Mr. Barofsky has burned all those bridges already.

We need an honest and experienced prosecutor to oversee enforcement at the S.E.C. This person must be beyond reproach and able to tackle wrongdoers, no matter how powerful their political connections or how complicated their cover story.

Fortunately, we have Mr. Barofsky. It is no time for business as usual at the S.E.C.; it sorely needs an effective head of enforcement.

Reminder: Campaign Finance Donor Search Will Be Deprecated

If you're a regular user of the presidential donor information returned by our Campaign Finance API, don't forget: that request type will be deprecated this Friday, Dec. 28. We won't be creating a new version; we're removing the data from our servers completely. Please update your code, and leave a comment if you have questions or concerns.

A Budget for Regulation

Casey B. Mulligan is an economics professor at the University of Chicago. He is the author of “The Redistribution Recession: How Labor Market Distortions Contracted the Economy.”

As Democrats and Republicans haggle over federal taxes and spending, another important policy tool gets less attention: regulation.

Government has a variety of ways it can achieve its objectives, including subsidies, taxes and regulation. For example, the government m ight attempt to help disabled people by subsidizing handicapped-accessible buildings. Or it could levy an extra tax on buildings that are not handicapped-accessible. Or it could simply refuse to permit structures to be built, or used in various situations, without being handicapped-accessible.

All three strategies are likely to affect building activity, increase the prevalence of handicapped-accessible buildings and in so doing help people with disabilities, as intended. The first strategy is ordinarily called government spending; the second, taxation; and the third, regulation.

Private-sector activities to comply with regulation do not appear in the government budget, whereas private-sector interactions with tax and spending programs do, in terms of the amount of money they pay or receive. (Regulation does need a government budget for enforcement, but so do taxes and spending, and enforcement is distinct from the private sector's compliance activities.)

Politicians have devised various budgetary gimmicks to help disguise what they tax and spend, and the sunset provision that led to next month's fiscal cliff is one of them. Nevertheless, experts and even the voting public get an idea of the importance of taxes and spending in the economy by looking at budget totals and perhaps a few of the largest line items.

The same cannot be said for regulation, which lacks any official budget. Attempts have been made to quantify regulation by the number of pages of law or pages of agency rules: President Ronald Reagan once bragged that his administration reduced one area of regula tion to 31 pages from 905.

However, pages can be misleading, because some words, sentences and paragraphs have more impact than others. For example, some laws, like those requiring children to attend school, have little impact because a vast majority of American families would send their children to school even if the law did not require it. Other laws, like many curfews, take up space on the books but are not enforced.

Because regulations have so far been poorly quantified, it is interesting to see a recent study of workplace regulation by complianceandsafety.com. It attempts to measure the aggregate of importance of workplace regulation by the dollar amount of fines collected by the Occupational Safety and Health Administration. Its chart, reproduced below , looks at the fines in reverse chronological order, and colors years according to the political party of the president in power.

complianceandsafety.com

OSHA fines have increased sharply since 2009. Perhaps more surprising is that the largest fine increases previously were under a Republican president (the first President George Bush) and the largest reductions were under President Bill Clinton.

As with taxes and spending, we cannot necessarily conclude that more regulation is “bad” or “good,” but it would be helpful for experts and voters alike to see a rigorous accounting for government regulation.

A Conservative Case for the Welfare State

Bruce Bartlett held senior policy roles in the Reagan and George H.W. Bush administrations and served on the staffs of Representatives Jack Kemp and Ron Paul. He is the author of “The Benefit and the Burden: Tax Reform â€" Why We Need It and What It Will Take.”

At the root of much of the dispute between Democrats and Republicans over the so-called fiscal cliff is a deep disagreement over the welfare state. Republicans continue to fight a long-running war against Social Security, Medicare, Medicaid and many other social-welfare programs that most Americans su pport overwhelmingly and oppose cutting.

Republicans in Congress opposed the New Deal and the Great Society, but Republican presidents from Dwight D. Eisenhower through George H.W. Bush accepted the legitimacy of the welfare state and sought to manage it properly and fund it adequately. When Republicans regained control of Congress in 1994 they nevertheless sought to repeal the New Deal and Great Society programs they had always opposed.

Energized by their success in abolishing the principal federal welfare program, Aid to Families With Dependent Children, in 1996, Republicans tried to abolish Social Security as well, through partial privatization during the Ge orge W. Bush administration, and they more recently have attempted to change Medicaid into a block grant program with funds going to the states and to turn Medicare into a voucher program.

In the 40th anniversary edition of his book, “Capitalism and Freedom,” Milton Friedman advised conservatives to use crises as opportunities to advance their agenda. “Only a crisis â€" actual or perceived â€" produces real change,” he contended.

Thus Republicans are now using the fiscal impasse to try to raise the age for Medicare and reduce Social Security benefits by changing the index used to adjust them for inflation. They know that such programs will be easier to abolish in the future if the number of people who qualify can be reduced and benefits are cut so that privatization becomes more attractive.

This is foolish and reactionary. Moreover, there are sound reasons why a conservative would support a welfare state. Historically, it has been conse rvatives like the 19th century chancellor of Germany, Otto von Bismarck, who established the welfare state in Europe. They did so because masses of poor people create social instability and become breeding grounds for radical movements.

In postwar Europe, conservative parties were the principal supporters of welfare-state policies in order to counter efforts by socialists and communists to abolish capitalism altogether. The welfare state was devised to shave off the rough edges of capitalism and make it sustainable. Indeed, the conservative icon Winston Churchill was among the founders of the British welfare state.

American conservatives, being far more libertarian than their continental counterparts, reject the welfare state for both moral and efficiency reasons. It creates unhappiness, they believe, and inevitably becomes bloated, undermining incentives and economic growth.

One problem with this conservative view is its lack of an empirical foundation. Research by Peter H. Lindert of the University of California, Davis, shows clearly that the welfare state is not incompatible with growth while providing a superior quality of life to many of those left to sink or swim in America.

In a new paper for the New America Foundation, Professor Lindert summarizes his findings. He points out that there are huge efficiencies in providing pensions and health care publicly rather than privately. A main reaso n is that in a properly run welfare state, benefits are nearly universal, which eliminates vast amounts of administrative overhead necessary to decide who is entitled to benefits and who isn't, as is the case in America, and eliminates the disincentives to work resulting from benefit phase-outs.

A 2003 study in the New England Journal of Medicine found that Canada's single-payer health system had less than a third of the per-capita administrative cost of the United States system, with its many private insurance companies and overlapping government programs â€" $307 per year in Canada versus $1,059 in the United States. And although American conservatives are fond of pointing to cases where Canadians come to the United States for treatment, a 2009 Harris poll found that 82 percent of Canadians favor their health system over the American one.

Americans believe that their health system is the best in the world, but in fact it is not. According to the Commonwealth Fund, many countries achieve superior health quality at much lower cost than paid by Americans. A detailed study of the United States and England in the American Journal of Epidemiology in 2011 found that over a lifetime the English have better health than Americans at a fraction of the cost.

The one area where the United States tops all other countries in terms of health is cost. According to the Organization for Economic Cooperation and Development, the United States spent more than any other country â€" 17.4 percent of gross domestic product on health in 2009, 8.3 percent through government programs such as Medicare and 9.1 percent privately. By contrast, Britain spent only 9.8 percent of G.D.P. on health, 8.2 percent publicly and 1.6 privately.

Thus, for no more than the United States already spends through government, we could have a national health-insurance system equal to that in Britain. The 7.6 percent of G.D.P. difference between American and British total health spending is about equal to the revenue raised by the Social Security tax. So, in effect, having a single-payer health system like Britain's could theoretically give Americans 7.6 percent of G.D.P. to spend on something else â€" equivalent to abolishing the payroll tax.

This is a powerful conservative argument for national health insurance. There are many ot her ways, as well, in which what the conservatives call bloated European welfare states are actually very efficient. This fact is disguised in commonly cited data for spending as a share of G.D.P. because so much social spending in the United States takes the form of tax expenditures, which are de facto spending.

The O.E.C.D. recently calculated net social spending in its member countries, taking account of tax expenditures and outlays that individuals are forced to make to compensate for the lack of commonly available public programs. On a gross basis, the United States ranks 23rd of 27 countries in the study, with social spending at 17.4 percent of G.D.P. versus an average of 22.4 percent. But based on adjusted data that accounts for tax e xpenditures, United States social spending rises to 27.5 percent of G.D.P., putting us in fifth place, well above the average of 22.2 percent.

American conservatives routinely assert that the people of Europe live in virtual destitution because of their swollen welfare states. But according to a commonly accepted index of life satisfaction, many heavily taxed European countries rank well above the United States, including the Netherlands (where total taxes were 38.7 percent of G.D.P. in 2010 compared with 24.8 percent in the United States), Norway (42.9 percent), Sweden (45.5 percent) and Denmark (47.6 percent).

Austerity for Posterity

Nancy Folbre is an economics professor at the University of Massachusetts, Amherst. She recently edited and contributed to “For Love and Money: Care Provision in the United States.“

Whether Democrats and Republicans come to budgetary agreement before the end of the year, it seems likely that some Americans are going to be thrown off a f iscal cliff. Even President Obama's proposals call for cuts in discretionary spending that will disproportionately affect low-income children.

The chasm between pro-family rhetoric and anti-family policies is widening. We are told to raise more children in order to prevent the aging of our population. We are told that education is the key to national economic success in this “age of human capital.” But what we see is a growing political effort to reduce public spending on children.

As Eduardo Porter recently explained, proposed cuts to federal spending will leave government as little more “than a heavily armed pension plan with a health insurer on the side” - not an entity likely to offer a helping hand to families struggling to support and educate the next generation.

Provisions now teetering on the edge of possible elimination include those that increased eligibility for the child tax credit and the earned income tax credit, which augment the after-tax income of families with children. Funds for Head Start, Early Head Start and child-care assistance will almost certainly be squeezed. Cuts in federal support for college attendance (both Pell grants and tax breaks) are likely to kick in, worsening student debt.

The probable cuts come on top of increased economic stress for those in charge of posterity. As the 2012 National Child and Youth Well-Being Index Report published by the Foundation for Child Development documents, the percentage of children living in families below the poverty line has increased over the last decade to 21.4 percent in 2011 from 15.6 percent in 2001.

More than a third of African-American and Hispanic children were living in poverty in 2011.

The median income of families with children up to 18 years old has declined significantly - more than $6,000 in inflation-adjusted dollars - over the same time period. Parents are less likely to be securely employed than they were in 2001 and more susceptibl e to unemployment and involuntary part-time work.

Investments in the early education of young children, widely considered to offer a high social and economic payback, are declining. After steady growth in the 1990s, the percentage of 3- and 4-year-olds enrolled in prekindergarten programs has failed to grow significantly for the last 10 years.

The number of children enrolled dwindled in 12 states, including Arizona, which dropped state support for its program. Four states (Michigan, Minnesota, Missouri and Ohio) enrolled a smaller percentage of 4-year-olds than a decade ago.

Inflation-adjusted state spending on prekind ergarten declined in 2010-11 for the first time ever. Inflation-adjusted spending per child also declined; partly as a result, several programs lost ground on quality standards (as monitored by site visits).

A new report by Legal Momentum comparing single-parent families in the United States with those in 16 other high-income countries finds that the American families are more vulnerable to poverty despite putting in longer hours of market work.

In other words, lack of effort to find paying jobs doesn't explain their plight. Rather, the jobs they find pay poorly, and lack of access to child care and sick leave makes it difficult for them to hold onto a good job when they find one.

The level of social assistance for single parents (primarily through Tempo rary Assistance to Needy Families and the Supplemental Nutrition Assistance Program) varies from state to state in the United States but is consistently lower everywhere than in any of the comparison countries but for Spain.

But while policies in many European countries are far more generous than those in the United States, they too are being crimped by austerity measures. A new report from Eurochild, an organization promoting the welfare and rights of children and young people, points to their growing vulnerability to cuts in social spending.

One could make the case that our increasingly elderly voting population is worried more about its own economic future than that of the next generation. But it's not clear that voters have a clear picture of the intergenerational impact of public spending, as neither political leaders nor academic researchers have laid this out in clear detail.

One thing is clear. Austerity that leads to reduced investments in children will reduce posterity's prosperity.

Medicare Spending Isn\'t Out of Control

Uwe E. Reinhardt is an economics professor at Princeton. He has some financial interests in the health care field.

It's the season of holiday cocktail parties, demanding intelligent chit-chat over Chardonnay. In such data-free environments it is always safe to say, “Medicare spending is out of control!” Wise heads will nod, because it is a credo with wide currency.

After all, as I explained in my previous post, traditional Medicare, which still attracts about 75 percent of all Medicare beneficiaries, affords its enrollees free choice of providers and therapy. In the jargon of health-policy wonks, it is “unmanaged.” Thus, it would not be surprising if unmanaged Medicare spending were, indeed, out of control.

But some caution is in order. A really wise guy in the crowd, one familiar with relevant data, might challenge you with: “Oh, really? In what sense is Medicare spending out of control?”

That query might have been prompted by the following data.

Kaiser Family Foundation

These data, most of which have been published by the Office of the Actuary, Centers of Medicare and Medicaid Services , of the Department of Health and Human Services (see Table 16), show that in most periods Medicare spending per Medicare beneficiary has risen more slowly than per-capita spending under private health insurance.

The exceptions are the period 1993-97, when private managed-care plans appeared to be able to hold down their outlays on health care better than did Medicare, and 2002-7, because there was a jump in spending as Medicare began, in 2006, to cover prescription drugs under the Medicare Prescription Drug, Improvement and Modernization Act of 2003.

So anyone claiming that “Medicare spending is out of control” can fairly be asked to explain on what data that assertion is based. The responses might be interesting.

Two objections might be raised to my interpretation of the data.

First, the benefit package of Medicare differs from those of private health insurers at any point in time. Worse still, benefit packages have varied over time in both sectors. This makes such comparisons difficult.

During the 1990s, for example, when Medicare's benefit package remained relatively stable, those in employment-based private insurance expanded significantly, especially in their coverage of prescription drugs, which soon became the fastest-growing component of health spending among private insurers. In those years, Medicare did not cover prescription drugs.

Similarly, during the last decade or so, many private health-insurance policies have incorporated more and more cost-sharing by patients at point of service.

To control as best they can for differences in benefit packages, the centers' actuaries also calculate comparative growth rates over longer periods of time for only those benefits that have been covered by both Medicare and private insurance plans. The two right-most columns in the exhibit present those calculations.

These columns, too, hardly support the assertion that Medicare spending is out of control. Relative to private insurance, the opposite appears to be the case, with the exceptions noted above.

A second objection to my interpretation of the data might be that Medicare is what economists call a “monopsonist,” a single buyer in a market with many sellers. In such a market, the monopsonistic buyer has considerable power over the level and the growth rate of prices over time.

With very few exceptions, Medicare pays prices to providers of health care below those paid by private insurers, which individually negotiate prices with each provider. I have already described Medicare's pricing practices in several earlier posts and pricing practices in the private insurance market as well.

Critics of Medicare - notably private health insurers - contend that the higher prices for health care paid by private insurers can be explained by a “cost shift” from government, notably Medicare, to private payers. This view reflects the idea that the providers of health care are to be “reimbursed” for w hatever costs they incur in treating patients, rather than budgeting backward from whatever revenue they are “paid,” like other sellers (e.g., hotels or airlines), which can charge different prices to different customers for the same thing.

The cost-shift hypothesis appears to have widespread, intuitive appeal, especially among employers and their agents, private insurers. Economists, this one included, do not find it persuasive, as can be seen in this review of the economics literature on the cost-shift hypothesis and this summary. Economists believe that what is denounced as “cost shifting” in health care is mainly just good old-fashioned, profit-maximizing price discriminatio n based on differential market power, which is not to be confused with cost shifting.

The economists' skepticism aside, I would caution the proponents of the cost-shift hypothesis to think twice before injecting it into the health policy debate.

If private insurers cannot resist price increases for health care in response to lower Medicare fees, then presumably they cannot resist price increases in response to other factors - e.g., the medical arms race, for which hospitals are known, or the “edifice complex” to which many hospitals (and, it should be noted, universities) have succumbed.

In a nutshell, reliance on the cost-shift hypothesis to explain the data in the exhibit above strikes me as an open admission by private insurers that they cannot offer effective countervailing market power vis-à-vis the providers of health care.

It would imply that health-spending growth in the private sector can be constrained only through substantial reductions in the use of health care - either through higher cost-sharing by patients or other managed-care techniques - reductions that would be all the deeper because they would be partly offset by price increases.

So I would remind the cost-shift aficionados of this Roman adage: bis cogitare semper memento (remember to always think twice).

Recommended Reading: Journo-Code Commit Messages

New York Times interactive news developer Tyson Evans wrote this fantastic article that's sure to fill you with holiday cheer: “Updated horse parser”: The year in journo-code commit messages at NiemanLab.org.

Enjoy.

Last-Ditch Attempt to Derail Volcker Rule

Simon Johnson is the Ronald A. Kurtz Professor of Entrepreneurship at the M.I.T. Sloan School of Management and co-author of “White House Burning: The Founding Fathers, Our National Debt, and Why It Matters to You.”

In a desperate attempt to prevent implementation of the Volcker Rule, representatives of megabanks are resorting to some last-minute scare tactics. Specifically, they assert that the Volcker Rule, which is designed to reduce the risks that such banks can take, violates the international trade obligations of the United States and would offend other member nations of the Group of 20. This is false and should be brushed aside by the relevant authorities.

The Volcker Rule was adopted as part of the Dodd-Frank financial reform legislation in 2010. The legislative intent was, at the suggestion of Paul A. Volcker (the former chairman of the Federal Reserve Board of Governors), to limit the kinds of risk-taking that very large banks could undertake. In particular, the banks are supposed to be severely limited in terms of the proprietary bets that they can make, to lower the probability they can ruin themselves and inflict great damage on the rest of society. (For a primer and great insights, see this commentary by Alexis Goldstein, a leader of Occupy the S.E.C.)

The Volcker Rule is almost finished winding its way through the regul atory process, and a version should be implemented soon. But in a last-ditch attempt to block it, the United States Chamber of Commerce has sent a letter to the United States Trade Representative asserting:

The Volcker Rule is discriminatory, as foreign sovereign debt is subject to the regulation, while Unted States Treasury debt instruments are exempt. This creates a discord in G20 and invites foreign governments to retaliate at a time when we need those same regulators in foreign countries to support initiatives to liberalize trade in financial services. Further, U.S.T.R. should conduct a very close examination to ensure the Volcker Rule does not violate any of our trade obligations.

This statement is correct with regard to the point that there are exemptions in the current version o f the Volcker Rule for banks' holdings of United States government debt, i.e., there are fewer restrictions on their holdings of Treasury obligations than on their holdings of foreign government debt.

But the idea that this violates the spirit or letter of our international obligations is flatly wrong. Perhaps that is why the letter doesn't point to any particular provisions of any specific trade agreements.

As a matter of basic principle, there is no violation, because there is no provision in any trade agreement that says United States banking regulators can't protect our financial system by engaging in prudent regulation. To the contrary, nations have always been allowed to restrict what their banks can regard as safe assets, and thus effectively to limit their holdings of foreign assets.

Think of it this way. Would we want United States banking regulators to be prohibited from distinguishing between United States debt and that of Greece, Ireland, Spain or Italy?

In practice, this distinction among countries already occurs. For example, the Basel II equity capital requirements allow every country to treat the debt of other governments with some caution (although, without doubt, more caution is needed than was actually used in the past, or even than is encouraged under the new Basel III agreement).

Some Canadian officials, for example, have said that Canadian government debt should receive equal treatment with United States government debt. This is a dangerous proposal. Canada has ridden the recent commodity price boom and, to many observers, its real estate looks pricey. Do Canadian banks have enough loss-absorbing capital to weather whatever storms lie ahead â€" if China slows down or energy prices fall for some other reason? They had trouble in the 1990s, when commodity prices fel l sharply. Why should American regulators allow our banks to take on a huge amount of Canadian risk?

Markets love a country until five seconds before they hate it. Surely we should have learned that by now, including from the European crisis.

We should continue to regard euro-zone debt with great suspicion. The euro-zone sovereign debt crisis may be over, and Greece's bond rating was upgraded sharply by Standard & Poor's this week. On the other hand, S.&P. and other ratings agencies have been wrong â€" and to a spectacular degree â€" in the not-too-distant past, including being overly optimistic about European sovereign debt and residential mortgages in the United States.

The Volcker Rule, and its international counterparts, like “ring fencing,” are forms of re-regulation, to be sure. Based on harsh recent experiences, countries are backing away from letting their banks and other people's b anks run unfettered around the world, taking on whatever risks they like and getting themselves into complicated legal and financial difficulties.

We need to reduce excessive and irresponsible risk taking throughout our financial system. The Volcker Rule is a significant step in the right direction. It is time for the regulators to finish the job.

In Most Rich Countries, Women Work More Than Men

In most of the developed world, women spend more time working each day than men do, if you include unpaid work.

According to the latest report on gender and employment from the Organization for Economic Cooperation and Development, across the developed world and in other countries tracked by the organization, men spend more minutes per day in paid work than women do.

The years covered are: Australia: 2006; Austria: 2008-09; Belgium: 2005; Canada: 2010; China: 2008; Denmark: 2001; Estonia: 1999-2000; Finland: 2009-10; France: 1998-99; Germany: 2001-02; Hungary: 1999-2000; India: 1999; Italy: 2002-03; Ireland: 2005; Japan: 2006; South Korea: 2009; Mexico: 2009; the Netherlands: 2006; New Zealand: 2009-10; Norway: 2000-01; Poland: 2003-04; Portugal: 1999; Slovenia: 2000-01; South Africa: 2000; Spai n: 2002-03; Sweden: 2000-01; Turkey: 2006; Britain: 2000-01; and the United States: 2010. Source: Organization for Economic Cooperation and Development. Secretariat estimates based on national time-use surveys. Further detail, see: Miranda, V. (2011), “Cooking, Caring and Volunteering: Unpaid Work Around the World”, O.E.C.D. Social, Employment and Migration Working Papers, No. 116, O.E.C.D. Publishing, Paris.

In the United States, for example, men spend 5 hours and 8 minutes working on the average day, whereas women spend 4 hours and 2 minutes.

But when it comes to unpaid work - activities like child care and cleaning - women spend vastly more time than men in every country the organization included in its analysis.

The years covered are: Australia: 2006; Austria: 2008-09; Belgium: 2005; Canada: 2010; C hina: 2008; Denmark: 2001; Estonia: 1999-2000; Finland: 2009-10; France: 1998-99; Germany: 2001-02; Hungary: 1999-2000; India: 1999; Italy: 2002-03; Ireland: 2005; Japan: 2006; South Korea: 2009; Mexico: 2009; the Netherlands: 2006; New Zealand: 2009-10; Norway: 2000-01; Poland: 2003-04; Portugal: 1999; Slovenia: 2000-01; South Africa: 2000; Spain: 2002-03; Sweden: 2000-01; Turkey: 2006; Britain: 2000-01; and the United States: 2010. Source: Organization for Economic Cooperation and Development. Secretariat estimates based on national time-use surveys. Further detail, see: Miranda, V. (2011), “Cooking, Caring and Volunteering: Unpaid Work Around the World”, O.E.C.D. Social, Employment and Migration Working Papers, No. 116, O.E.C.D. Publishing, Paris.

Women perform a disproportionate share of unpaid work regardless of whether they are employed. In couples where both partners have paid jobs, women spend more than two hours per day in unpaid work, the report says, and that gap “hardly narrows” even when you restrict the sample to couples with both partners working full time. Among couples in which the woman works and the man doesn't, men do only as much housework as the women, and spend far less time in child care.

The biggest gender gaps in unpaid work, in fact, involve taking care of children: working mothers devote about 50 percent more time to child care than nonworking fathers do.

When you look at time spent in paid and unpaid work together, women edge out men in most countries included in the analysis.

The years covered are: Australia: 2006; Austria: 2008-09; Belgium: 2005; Canada: 2010; China: 2008; Denmark: 2001; Estonia: 1999-2000; Finland: 2009-10; France: 1998-99; Germany: 2001-02; Hungary: 1999-2000; India: 1999; Italy: 2002-03; Ireland: 2005; Japan: 2006; South Kor ea: 2009; Mexico: 2009; the Netherlands: 2006; New Zealand: 2009-10; Norway: 2000-01; Poland: 2003-04; Portugal: 1999; Slovenia: 2000-01; South Africa: 2000; Spain: 2002-03; Sweden: 2000-01; Turkey: 2006; Britain: 2000-01; and the United States: 2010. Source: Organization for Economic Cooperation and Development. Secretariat estimates based on national time-use surveys. Further detail, see: Miranda, V. (2011), “Cooking, Caring and Volunteering: Unpaid Work Around the World”, O.E.C.D. Social, Employment and Migration Working Papers, No. 116, O.E.C.D. Publishing, Paris.

The chart above shows how much more time women spend than men on unpaid work (light blue bars); how much less time women spend than men on paid work (medium blue bars); and how much time over all women spend compared to men on paid and unpaid work combined (dark blue diamonds).

As you can see, across the member countries of the Organization for Economic Cooperation and Development, wome n spend 21 minutes more time, on average, in total work per day than men do.

The gap is exactly the same in the United States. Of the countries surveyed, the gap is biggest in India, where women spend on average 94 minutes more time than men on total work each day.

In a few countries analyzed, though, men do spend slightly more time than women on total work per day: Denmark, Sweden, Norway, the Netherlands and New Zealand. In Britain and Germany, the two sexes spend almost equal time on total work each day, although the composition of that work falls along traditional gender lines, with men spending more of their time on paid work and women more on unpaid work.

For whatever reason, the traditional division of labor appears deeply ingrained, in both rich countries and poor ones. The report observes also that policies intended to help promote work-life balance, such as parental leave options, often counterintuitively have the effect of reinforcing gender role s at home:

[M]others generally make much wider use than fathers of parental leave options, part-time employment opportunities, and other flexible working time arrangements like teleworking. It is primarily mothers, for example, who avail themselves of long parental leave â€" and they are frequently reluctant to give up leave to their partner's benefit. The result is a reinforcement of traditional gender roles. In fact, even when policies allow or encourage women to change the nature of their participation in employment or their hours of work, inequalities at home and in contributions to home life have a tendency to remain. A vicious circle is thus established: as long as mothers reduce employment participation when they have (young) children in the household, employers have an incentive to invest less in their female than in their male workers.

A Tale of Two Welfare States

Casey B. Mulligan is an economics professor at the University of Chicago. He is the author of “The Redistribution Recession: How Labor Market Distortions Contracted the Economy.”

In “A Tale of Two Cities,” Dickens wrote, “It was the age of wisdom, it was the age of foolishness.” The governments of the United States and Britain are embarking on different approaches to helping their poor and unemployed, and one of them may regret its policy dec isions.

As recently as 2010, Britain had a complex system of antipoverty programs ranging, including housing benefits, job seekers' allowances and mortgage-interest assistance. With so many benefits available, many people found they could make almost as much from the combined programs as they could from working, even while any one of the benefits might not have been all that significant by itself. As Britain's Department for Work and Pensions described, beneficiaries remained “trapped on benefits for many years as a result.”

Beginning next month, Britain will strive to put its welfare system on a different path by unifying many programs under a single “universal credit” system, what the department describes as an “integrated working-age credit that will provide a basic allowance with additional elements for children, disability, housing and caring.” The department forecasts that its “universal credit will improve financial work incentives by ensuring that support is reduced at a consistent and managed rate as people return to work and increase their working hours and earnings.”

In the United States, the welfare system includes dozens of federal programs, enumerated by Robert Rector of the Heritage Foundation as those “providing cash, food, housing, medical care, social services, training and targeted education aid to poor and low-income Americans.” Beginning in 2014, more programs will be added and expanded by the Patient Protection and Affordable Care Act: new health-insurance premium-support programs, new cost-sharing subsidies for out-of-pocket health expenditures, financial hardship relief from the new individual mandate penalties, new sub sidies for small businesses employing low-income people and expansion of Medicaid.

The Congressional Budget Office estimates that the Affordable Care Act's means-tested subsidies and cost-sharing will implicitly add more than 20 percentage points to marginal tax rates on incomes below 400 percent (see Page 27 of the C.B.O. report) of the poverty line (a majority of families fit in this category) by phasing out the assistance as family incomes increase, although a number of families will not receive the subsidies because they already get health insurance from their employer.

These marginal tax-rate additions are on top of the marginal tax rates already in place because of personal income taxes, payroll taxes, unemployment insurance, food stamps and other taxes and means-tested government program s. In 2014, some Americans will be able to make almost as much from combined benefits as they would by working, and sometimes more.

In summary, the United States intends to move in the direction of more assistance programs and higher marginal tax rates, while Britain intends to move in the direction of fewer programs and lower marginal tax rates.

Either country, or both, may ultimately fail to fully carry out the new programs by granting waivers and exceptions, refusing to administer them or by rewriting its new laws. But if both do follow through, perhaps future empirical economic research comparing the United States and Britain will reveal which country is living an age of wisdom and which one in an age of foolishness.

The True Burden of Government

Bruce Bartlett held senior policy roles in the Reagan and George H.W. Bush administrations and served on the staffs of Representatives Jack Kemp and Ron Paul. He is the author of “The Benefit and the Burden: Tax Reform â€" Why We Need It and What It Will Take.”

Famously, Milton Friedman always said that the true burden of government is what it spends, not what it taxes. While correct up to a point, his statement has unfortunately led many conservatives to believe that the budget deficit is of no economic importance. That is to say, they believe there is nothing to be gained by reducing the deficit unless it results from lower spending, because th at and that alone reduces the burden of government, and reducing the burden of government is the only thing that will raise growth.

However, as I explained last week, there is a cost from deficits in the form of interest on the debt. If government revenues are too low to finance the level of spending that voters insist upon, spending automatically rises. Eventually, interest on the debt can only be paid with higher taxes, even if all spending except for interest is abolished.

Put another way, the amount of future spending cuts or tax increases necessary to stabilize government finances will always have to be larger when spending increases or tax cuts are deficit-financed. That is because interest increases the size of the future fiscal adjustment. Compounding means that the longer an adjustment is put off, the larger it must eventually be. And of course, debt default i s simply a form of tax that falls disproportionately on bondholders; inflation is a tax paid by everyone.

Additionally, government borrowing has effects on the economy independent of spending in general. The economic impact of spending depends on what it is for and that impact may be positive or negative. Conservatives often imply that all spending reduces growth by pre-empting resources that the private sector could use better. But unless one believes that anarchy maximizes growth, that is nonsense.

Government borrowing necessarily takes money out of capital markets, crowding out private investors who would otherwise use those funds for business expansion, new plants and equipment or other business purposes. Such crowding out may be modest today, mainly because a slowdown in growth has sharply reduced the demand for capital. Should growth strengthen, federal borrowing could become a major constraint on investment.

Obviou sly, many forms of spending greatly increase growth. Military spending protects us from threats from abroad, the police and courts protect our lives and property, schools raise the quality of the labor force, and public works like roads are vital to commerce, to name just a few examples.

Moreover, conservatives tend to believe that to the extent that taxation imposes a burden on the economy, it is largely in its aggregate form. That is, the total amount of revenue collected constitutes the burden of taxation; therefore, all tax cuts are per se stimulative to growth.

To the extent that the tax structure imposes a burden, it is only in the form of its effects at the margin, on the last dollar earned, conservatives believe. They deny that tax expenditures, special provisions of the tax code that cause individuals and businesses to spend or invest in particular ways, diminish growth.

Conservatives may acknowledge that tax expenditures are inferior to rate reduc tions in stimulating growth, but in practice conservative groups like Americans for Tax Reform, the misnamed organization run by the Republican tax guru Grover Norquist, support every single new tax expenditure because they think all tax cuts are per se good and always better than an equivalent government spending program for the same purpose.

Such groups also oppose any elimination of tax expenditures as a tax increase that will impose an unconscionable burden on the economy and diminish political pressure to cut spending. But in the real world there is no meaningful economic difference between direct spending and spending through the tax code.

If spending diminishes growth it has to be because resources are misallocated. But tax expenditures also misallocate resources. The idea that there is a significant difference between a misallocation resulting from the receipt of a government check and one resulting from a special tax deal is nonsense.

Conservatives cannot acknowledge this because it would lead them to accept the fact that eliminating tax expenditures, even if not accompanied by offsetting tax cuts, might raise growth for the same reason that cutting spending raises growth in their economic model.

Senator Tom Coburn, Republican of Oklahoma, has been asserting for years that many tax expenditures are identical to spending in all but name and are nothing but giveaways with no economic benefit except to the recipients. On Dec. 13, he released a new list of egregious tax loopholes that should be abolished and raise $130 billion of additional revenue over the next decade.

His view has led to a war of words with Mr. Norquis t for several years. Writing in The New York Times, Senator Coburn explained that the Norquist tax pledge, which opposes any tax increase for any reason, is ultimately counterproductive on Mr. Norquist's own terms. The deficit, Senator Coburn says, is a type of tax increase on future generations. And by increasing the likelihood of a future debt crisis, the pledge virtually assures future explicit tax increases in the form of higher interest rates and debasement of the currency.

Conservatives believe that slashing entitlement programs like Medicare is the key to avoiding a future tax increase. But for those who will have to work longer before qualifying for Medicare or spend more out of pocket to compensate for cuts in medical benefits, these effects are little different to them than the equivalent tax increase. What really is the difference to them of paying $1,000 more a year beca use of Medicare cuts or $1,000 more in taxes?

In short, the black-or-white distinction between taxes and spending, which conservatives believe to their core, is much more complex when looking at specific policies. Tax expenditures can be de facto spending and benefit cuts may be de facto tax increases.

The goal of public policy should be to use the policy instrument best suited to the nature of a problem. A tax incentive may simply work better than the equivalent spending program or vice versa. There is no reason to think, as conservatives do, that a tax cut is always superior to direct spending or that spending constitutes an economic burden while tax expenditures are costless.

The \'Mommy Penalty,\' Around the World

Around the developed world, women earn less than men by a sizable margin: as of 2010, about 16 percent less when employed in similar full-time jobs. Women with children, though, experience a far larger wage gap, a phenomenon known as the “mommy penalty.”

Gender pay gap is defined as the difference between male and female median wages divided by male median wages, for full-time workers only. “Children” defined as aged less than 16 years old. Source: Organization for Economic Cooperation and Development.

That chart is from the Organization for Economic Cooperation and Development's latest report on the gender gap around the world. It shows that, among members of the O.E.C.D., the median woman without children who works full time earns 7 percent less than the median man working full time, whereas the median female full-time worker with children earns 22 percent less than the median male full-time worker.

The United States is about on trend with developed countries over all: in the United States, the median childless, full-time-working woman of reproductive age earns 7 percent less than the median male full-time worker. For women with children, the wage gap more than triples, to 23 percent. That gap in Japan is even bigger - the median Japanese mother working full time earns 6 1 percent less than the median Japanese full-time male worker.

And remember, those wage gaps are for full-time workers only. The gap widens if you compare all working mothers, since women are much more likely than men to work part time.

Why do mothers earn so much less than both men and childless women?

In the United States, much of the “mommy penalty” can be explained by the types of jobs mothers versus non-mothers take. In particular, compared with non-mothers, mothers end up in jobs that pay a higher share of their compensation in benefits rather than wages.

Benefits should play less of a role in most other rich countries, which have some form of universal health coverage. Occupational choice still accounts for much of the wage gap, though, as do differences in hours worked even among full-time workers.

Access to child care appears to affect the motherhood penalty as well, the report says. Women are more likely than men to be the primary caregivers for their children, so if affordable child care is not available, women are more likely to take time away from their jobs to care for their children and be penalized with lower wages. Higher enrollment rates in formal child care programs are thus associated with smaller gender wage gaps.

Source: Organization for Economic Cooperation and Development.

Interestingly, longer periods of maternity and parental leave are associated with a wider wage gap between men and women. The report notes that countries with more generous parental lea ve policies tend to have lower enrollment in formal child care programs.

A Real Right to Work

Nancy Folbre is an economics professor at the University of Massachusetts, Amherst. She recently edited and contributed to “For Love and Money: Care Provision in the United States.”

All Americans willing and able to work have a right to paid employment. If the private sector can't generate sufficient jobs, the public sector should prov ide them.

This definition of “right to work” obviously differs from the one that Republican legislators in Michigan deployed when they passed a new law absolving workers from the responsibility of paying union fees even if they gain contract benefits from them. But perhaps their actions will dramatize the need to challenge their framing and reclaim the genuine meaning of the phrase.

Most of us live in a world in which paid employment is the only avenue to economic self-sufficiency. Without it, families maintained by working-age adults are largely dependent on the kindness of strangers, otherwise known as extended unemployment insurance and food stamps. Yet, for more than four years, this nation has tolerated levels of unemployment that hav e essentially made it impossible for most of those seeking paid employment to find it, with a ratio of unemployed workers to job openings of more than three to one.

Some Republicans have long insisted that many of the jobless, relaxing in a billowy social safety net, simply aren't trying hard enough to find a job. My fellow Economix contributor Casey Mulligan makes a similar argument when he contends that the poverty rate should have risen ­between 2007 and 2011, but didn't ­because public assistance was neutralizing the effect of job loss and undermining incentives to work.

But Shawn Fremstad of the Center for Economic Policy and Research challenges that methodolo gy, pointing to measurements showing that the poverty rate did rise significantly among working-age adults over this period.

Further, increased unemployment contributed to economic stress across most of the social spectrum, not just among the poor and near poor. Between 2007 and 2011, average household income declined in all four bottom quintiles.

Expansion of unemployment insurance and means-tested benefits are not the best solution to persistently high unemployment. As John Stuart Mill emphasized many years ago, those who are capable of supporting themselves should not rely on the habitual aid of others. But Mill went on to explain why such aid is sometimes necessary:

Energy and self-dependence are, however, liable to be impaired by the absence of help, as well as by its excess. It is even more fatal to exertion to have no hope of succeeding by it, than to be assured of succeeding without it. When the condition of any one is so disastrous that his energies are paralyzed by discouragement, assistance is a tonic, not a sedative: it braces instead of deadening the active faculties.

Paralysis by discouragement is a pretty good description of a growing segment of the United States population. In general, the higher the unemployment rate in a state, the higher the percentage of discouraged workers (those who did not search for work in the previous four weeks, for the specific reason that they believed no jobs were available for them) and the higher the percentage of marginally attached workers (those who did not search for work in the previo us four weeks, for any reason).

Labor force participation has declined significantly since the last recession began, especially among less-educated men.

The best way to encourage American workers, increase family income and reduce public spending on unemployment insurance and food stamps is to create more jobs. The simplest way to create more jobs is to increase public-sector employment. The federal government could also invest in programs to encourage small businesses to hire workers to improve our aging physical infrastructure (including roads and bridges), our social infrastructure (including early childhood education and home services for the elderly) and our environmental sustainability (including improved energy efficiency and installation of the solar voltaic technologies that Germany now heavily relies upon).

All these investments offer a high social rate of return that private businesses can't easily capture on their own.

By contrast, there is no evidence that lower tax rates for the rich promote either job creation or economic growth (a detailed study on this topic by the Congressional Research Service was withdrawn as a direct result of Republican protest).

President Obama and Congressional Democrats have called for more stimulus spending aimed at job creation, only to meet tremendous opposition from Republicans. Preoccupation with deficit reduction has crowded out discussion of job creation. Public employment grew steadily during the previous Bush administration. During the Obama administration, however, it has significantly declined.

Now, it appears that any remaining concern with job creation may be thrown over the fiscal cliff.

The next time someone with a comfortable paycheck tells you that American workers no longer have a work ethic, please explain to them that right now, there's not enough paid work to go around.

Which is why we should fight for a real right to work.

The Trade-Off Between Economic Growth and Deficit Reduction

Laura D'Andrea Tyson is a professor at the Haas School of Business at the University of California, Berkeley, and served as chairwoman of the Council of Economic Advisers under President Bill Clinton.

The economy is continuing to recover from its deepest recession since the Great Depression, but the pace of recovery is frustratingly slow. The question is why, and the answer has profound implications for fiscal policy and for the debate over deficit reduction and economic growth that has transfixed Washington.

Since 2010, annual growth of gross domestic product has averaged about 2.1 percent. This is less than half the average pace of recoveries from previous recessions in the United States since the end of World War II, according to a recent study by the Congressional Budget Office. Both potential G.D.P., a measure of the economy's underlying capacity, and actual G.D.P. have grown unusually slowly compared with previous recovery periods.

Slow G.D.P. growth has meant slow growth in employment. Payroll employment has been expanding at a rate of about 150,000 jobs per month during the last two years, only slightly above the growth of the labor force. Employment growth h as been largely consistent with overall G.D.P. growth and with the “jobless” pattern of the 1990-91 and 2001 recoveries.

In both this recovery and the previous two, the rebound in employment growth has been weaker and later than the rebound in G.D.P. growth. But G.D.P. growth in the current, jobless recovery has been slower. Another salient difference is that the loss of jobs in the most recent recession was more than twice as large as in previous recessions, so a slow recovery has also meant a much higher unemployment rate.

Why has G.D.P. growth been so tepid compared with previous recoveries? Most economis ts believe that weak aggregate demand is the primary culprit. The 2008 recession resulted from a systemic financial crisis rooted in an asset bubble that gripped the housing market with particular ferocity. Private sector demand contracts sharply and recovers slowly after such crises.
The large and persistent decline in private-sector demand that began the 2008 recession and that explains the painfully slow recovery is apparent in the private-sector financial balance - net private saving, the difference between private saving and private investment.

The private-sector financial balance swung from a deficit of âˆ'3.7 percent of G.D.P. in 2006, at the height of the boom, to a surplus of about 6.8 percent in 2010 and about 5 percent today. This represents the sharpest contraction and weakest recovery in private-sector demand in the post-World War II perio d.

Growth in two components of private demand - consumption and residential investment - has been especially slow in this recovery compared with the average for previous recoveries. This is not surprising.

Residential investment is still depressed as a result of overbuilding during the 2004-8 housing boom and the tsunami of foreclosures that followed. Large losses in household wealth, deleveraging from excessive debt, weak growth in wages and household income, and a decline in labor's share of national income to a historic low have combined to constrain consumption growth. Wobbly consumer confidence and the concentration of most income gains at the top of the income distribution have also contributed.

The recovery of business investment demand has followed a different pattern. Indeed, the gr owth of business investment has been slightly stronger during the current recovery than the average for previous ones. But after plummeting to new lows during the recession, the ratio of net business investment to G.D.P. remains depressed by historical standards. Lower net investment compared with the economy's capital stock is a major reason that the growth rate of potential G.D.P. has been so slow.

Throughout the recovery, business surveys have identified lackluster customer demand and weak sales prospects as the primary factors holding down business investment. Business confidence has remained subdued as a result of uncertainty about the future growth of markets both at home and abroad and more recently about the future course of United States fiscal policy.

Limits on credit availability were also significant deterrents to investment, especially by small and medium-size firms at least through 2010, when banks began to ease their commercial loan terms.

We ak investment demand cannot be explained by low profits and high taxes: the profit share of national income has hit a historic peak and taxes on investment income are at historic lows.

Another factor contributing to the slow pace of the current recovery relative to previous recoveries has been the relatively weak growth of government spending on goods and services by both state and local governments and by the federal government.

Indeed, the contraction in state and local government spending and the associated decline in public-sector employment have been major headwinds restraining G.D.P. growth.

The increase in federal government purchases of goods and services in the 2009 stimulus bill mitigated but did not offset the effects of weak private-sector demand through 2010. But since then, the slowdown in such purchases has been a drag on G.D.P. and employment growth.

Af ter three years of recovery, the economy is still operating far below its potential and long-term interest rates are hovering near historic lows. Under these circumstances, the case for expansionary fiscal measures, even if they increase the deficit temporarily, is compelling.

A recent study by the International Monetary Fund finds large positive multiplier effects of expansionary fiscal policy on output and employment under such circumstances.

And more output and employment now would mean higher levels in the future, because stronger demand now would encourage more private investment and stem the loss of skills and productivity resulting from long-term unemployment and the drop in the labor force participation rate.

The rationale for expansionary fiscal policy is particularly compelling for federal investment spending in areas like education and infrastructure that have large multiplier effects on the current level of output and employment and strong returns over time.

By the same logic, the $600 billion of revenue increases and spending cuts scheduled for next year - the so-called fiscal cliff - would have large negative effects on demand, output and employment and would reduce future potential output as well.

The fiscal cliff packs a powerful punch: there will be 3.4 million fewer jobs by the end of 2013 if Congress allows these policies to take effect.

The economy does not need an outsize dose of fiscal austerity now; it does need a credible deficit-reduction plan to stabilize the debt-to-G.D.P. ratio gradually as the economy recovers. As I contended in an earlier Economix post, the plan should have an unemployment-rat e target or trigger that would postpone deficit-reduction measures until the target is achieved. (In a move that signals its abiding concern about the recovery's strength and resilience, the Federal Reserve has just announced an unemployment-rate target for monetary policy, committing to keep short-term interest rates near zero until the unemployment rate falls to 6.5 percent.)

The goal of deficit reduction is to ensure the economy's long-term growth and stability.

It would be the height of fiscal folly to kill the economy's painful recovery from the Great Recession in pursuit of this goal.

Volcker Spots a Problem

Simon Johnson is the Ronald A. Kurtz Professor of Entrepreneurship at the M.I.T. Sloan School of Management and co-author of “White House Burning: The Founding Fathers, Our National Debt, and Why It Matters to You.”

On Monday, at the end of a long day of wrangling over technical details at the Federal Deposit Insurance Corporation's Systemic Resolution Advisory Committee, Paul A. Volcker cut to the chase. The resolution authority created by the Dodd-Frank financial reform legislation was a distinct improve ment on the previous situation, making it easier to handle the failure of a single large financial institution.

It does not, however, end the myriad problems associated with that most daunting and modern of phenomena: too big to fail.

At age 85, Mr. Volcker, the former chairman of the Federal Reserve, speaks softly and displays a razor-sharp mind. The room where the committee met was hushed as everyone leaned forward to catch his words. Mr. Volcker incisively observed that the general legal framework of Dodd-Frank, as currently being put into effect, definitely puts more effective powers in the hands of the Federal Deposit Insurance Corporation to handle the failure of what is known as a systemically important financial institution.

But the bigger issue is a point made by Mr. Volcker and others at the table. When big banks boom, they find new ways to finance themse lves and, too often, regulators go along. The assets they buy look like a sure thing until the moment they collapse in value. This is the classic and future recipe for systemwide panic and potential collapse. The only solution to prevent this is to limit the size of the largest institutions and the activities they can undertake.

The F.D.I.C. has long had the powers necessary to handle the failure of a bank whose deposits it insures. It can take over such an institution, sell off the viable parts of its business and place the remainder in a form of liquidation, so that as much asset value as possible is recovered. Management and boards of directors are immediately let go (with no golden parachutes). Shareholders are typically wiped out â€" meaning that the value of their shares falls to zero, as it would in the case of bankruptcy. Creditors to the original company also suffer losses â€" with the full extent determined by how much value the F.D.I.C. can recover; again, a close parallel with bankruptcy, but the F.D.I.C. is in charge, not a bankruptcy court judge.

Sometimes this kind of F.D.I.C.-managed process is referred to as nationalization â€" in fact, that is the term the White House used to describe this option in early 2009, when it was proposed that Citigroup, Bank of America and other large bank-holding companies should go through a form of F.D.I.C. resolution. But nationalization is a complete misnomer and President Obama was poorly advised when he used the term.

The F.D.I.C. operates state-of-the-art bank resolution processes. Depositors typically do not lose access to their funds for even five seconds â€" and that includes all forms of electronic access. And the reason we want the F.D.I.C. to do this is simple: it prevents the kind of disruptive bank runs that previously plagued the United States and that helped make the economy of the 1930s so depressed.

The question for t he modern financial world, however, is not so much how to handle the failure of small and medium-size banks with retail deposits. The specter that haunts us â€" in the form of Lehman's bankruptcy and the bailouts provided subsequently to other large firms â€" is how to handle the imminent collapse of large nonbank financial companies.

The F.D.I.C. is now central to a process that can take any kind of financial company through resolution. The Federal Reserve and the Treasury are also involved, and safeguards are in place to prevent capricious action. These may sometimes delay action.

But the F.D.I.C. unquestionably now has the legal authority and practical ability to impose losses on shareholders and creditors of the holding company. It has also embarked on an ambitious outreach program to explain that the goal is to allow operating subsidiaries to keep functioning, in the hope of minimizing the disruption to the world's financial system. (Big banks are now organ ized with a single holding company owning and controlling a large number of operating subsidiaries.)

No taxpayer money is supposed to be put at risk in this situation. Shareholders in the holding company will be wiped out. Creditors will find their debt converted to equity, typically involving a reduction in value. This new equity forms the capital base of the continuing company â€" meaning its obligations are restructured so that it is again solvent (meaning the value of its assets exceeds the value of its liabilities).

Creditors to operating subsidiaries would suffer losses only if there were not enough debt at the holding-company level â€" in other words, after reducing all that debt to zero (converting it entirely into equity), the company's liabilities still exceed its assets.

Together with Sheila Bair, the former chairwoman of the F.D.I.C., and other colleagues, I wrote to the Federal Reserve Board earlier this year, impressing upon them the importance of ensuring there is enough debt at the holding company â€" relative to potential losses at the operating subsidiary level. I was disappointed to learn on Monday that the Fed is still a considerable distance from issuing even a proposal for comments on this important issue.

In addition to Mr. Volcker, among the other heavyweights at the table were Anat R. Admati of Stanford, Richard J. Herring of Wharton, David Wright of the International Organization of Securities Commissions and several experienced practitioners.

Big banks do not typically fail individually. More often, there are herds that stampede toward a particular issue or fad: emerging-market debt (1970s and 1990s); commercial real estate (United States, 1980s); residential real estate (United States, Spain, Ireland, Britain, 2000s); sovereign debt (Europ e, 2000s).

These banks finance themselves with short-term wholesale money â€" creating the impression that this is safe, when in fact it is incredibly precarious (think Iceland in 1998 or the exposure of American money-market funds to European banks as recently as 2011.) In any truly dangerous boom, markets and regulators become equally infatuated with this new way of doing business â€" until it collapses.

Can the new resolution authority handle the next big wave of potential failures, whatever it might be? Probably not, even with the greater level of cooperation announced on Monday of the F.D.I.C. and the Bank of England, with an eye to handling cross-border resolution of difficulties between the two nations, which could be immense considering how our big banks operate.

If it is built well and works properly, a good resolution framework allows a company to fail, without soci alizing losses and without destabilizing the financial system. As a result, it will provide a level of market discipline that should lessen the herd mentality of taking on the kind of risks that create a systemic problem â€" and the next big wave of failures. But the primary lesson from F.D.I.C. planning and our discussions is this: no resolution framework can correct a systemic problem once it has occurred.

The United States needs multiple fail-safes. As Professor Admati has been arguing, we should rely on equity â€" not debt â€" to absorb losses in our financial system (see this comment letter). In addition, I stand with the original intent of the Volcker Rule and with the current position of Thomas Hoenig (the current vice chairman of the F .D.I.C.): in addition to stronger resolution powers and much more equity capital, the size of the largest financial institutions should be capped and the activities they can undertake limited.