The deficit trap

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The preliminary report by the chairs of the deficit commission has been getting headlines since it was released Nov. 10. The co-authors are Democrat Erskine Bowles and Republican Alan Simpson. Bowles gets paid $335,000 per year as a director of Morgan Stanley, one of the recipients of the Wall Street bailout. Simpson, a former senator with a generous government pension, calls Social Security "a milk cow with 310 million tits."

The Bowles-Simpson report is a poisonous prescription, likely to kill the patient while attempting to cure the symptom. And while focusing on a symptom (the federal deficit), the commission ignored the underlying disease: the decay of the U.S. economy.

Even on the stated goal of deficit reduction, the report comes up short. The authors admit that their proposals to cut Social Security benefits and raise the retirement age are not even related to deficit reduction. The radical changes they propose in the tax system do little to increase revenue, but include huge cuts in the already-low tax rates paid by billionaires. At the same time, progressive proposals, like a financial transactions tax on Wall Street speculation, were not even considered. And Simpson and Bowles' solution to Medicare costs, which account for most of the long-term deficit, is to make patients pay more and, if that doesn't work, "take additional steps as needed." In other words, punt.

Nobel Prize-winning economist Paul Krugman summed up the overall impact of the report. It "clearly represents a major transfer of income upward, from the middle class to a small minority of wealthy Americans," he wrote. "Under the guise of facing our fiscal problems, Mr. Bowles and Mr. Simpson are trying to smuggle in the same old, same old -- tax cuts for the rich and erosion of the social safety net."

Krugman is absolutely correct. But I would go further. The whole deficit discussion, including the Bowles-Simpson report, is a three-fold trap.

First, the report includes dozens - maybe hundreds - of specific proposals. A few sound good - like ending the capital gains and dividend tax break for Wall Street investors, or raising the minimum Social Security benefit for low-income retirees. But these few proposals do not change the overwhelming impact - almost everyone gets clobbered by this proposal, except the super-rich, who do very well. Any gains made by low- and moderate-income workers will be far outweighed by fee increases, cuts in benefits and services, and increases in state and local taxes made necessary by the drying-up of Federal programs. It is indeed a "major transfer of income upward."

The second trap: focusing on the details of the Bowles-Simpson proposal risks getting sucked into the whole premise that the deficit is the single most urgent economic problem the U.S. faces, and that it has to be dealt with right now. Economist Dean Baker answers this eloquently: "It is utterly loony to be focused on the projected deficit in 2030, when we have tens of millions of people who are seeing their lives ruined today by the downturn. This is like debating the colors to paint the classrooms when the school is on fire with the students still inside."

The deficit grew under the Bush administration, with tax cuts for the rich and wars in Iraq and Afghanistan. With the economic crisis, the deficit soared: sales and income fell, which meant less tax revenue, and unemployment soared, resulting in higher payments for unemployment benefits, food stamps, etc. The fastest way to reduce the deficit is to get the economy moving. But the Bowles-Simpson report proposes immediate cuts in government spending and the government workforce. This would act as a brake on any economic recovery, and add to the unemployment crisis.

The third trap is the idea that the deficit is the nation's biggest long-term problem, and that we owe it to our grandchildren to fix the problem now. This is false.

The real threat to our economy and to our grandchildren is our decaying infrastructure; an environmentally and technologically unsustainable dependence on wasteful energy consumption and a growing population without access to adequate education or health care.

The budget deficit is a symptom - not the cause - of an out-of-balance economy increasingly based on speculation and profiteering instead of production of useful goods and services. Instead of a deficit commission, we need a commission for an industrial policy for America's physical and social infrastructure.

Public opinion polls show that for the overwhelming majority, the most urgent issues are jobs and the economy, not the deficit. The deficit commission is being used as a smokescreen to block measures urgently needed to help victims of the economic crisis and to create jobs. Only a mass movement - with letters, phone calls, and demonstrations - can put the focus where it belongs: extending unemployment benefits, funds to states and cities to stop the wave of layoffs, and enacting a new stimulus program.

Image: erci731 // CC BY-NC-SA 2.0

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  • I agree that the author should have mentioned Obama, since Obama appointed the commisioners and established the commission after Congress voted it down. I read that Clinton was going to privatize Social Security but he was distracted by the Lewinsky scandal. The best way to reduce the deficit is to cut the military budget and end the wars in Iraq and Afghanistan. Social Security payments should be increased not decreased.

    Posted by , 11/23/2010 5:07pm (4 years ago)

  • { "Only a mass movement - with letters, phone calls, and demonstrations - can put the focus where it belongs: extending unemployment benefits, funds to states and cities to stop the wave of layoffs, and enacting a new stimulus program."

    Yes, but ONLY if people are ready to finally withdraw their support from the Obama administration, and start .... }

    The author has it right in his discussion on Trap 3. Rebalancing an out of whack (and I fully agree that it is) Economy is not identical with Stimulus. A wanton Stimulus simply maintains status quo by putting band aids where the imbalances are about to break out. Rebalancing involves redirecting the money already out there which is getting misdirected (eg into speculation) or escaping legitimate taxation (eg Capital Gains) or getting wasted (ridiculous pensions on public money).
    To the extent, redirecting is not sufficient, deficit can be resorted.
    ** But starting with Stimulus spending again is an attack on the symptom (unemployment) rather than disease (out of whack limbs in the economy: the prices of healthcare, university education, houses, financial paper, are all out of whack with the overall REAL economy that is hemorrhaging jobs).**
    You really had it nailed when you say:

    "The third trap is the idea that the deficit is the nation's biggest long-term problem, and that we owe it to our grandchildren to fix the problem now. This is false.

    The real threat to our economy and to our grandchildren is our decaying infrastructure; an environmentally and technologically unsustainable dependence on wasteful energy consumption and a growing population without access to adequate education or health care.

    The budget deficit is a symptom - not the cause - of an out-of-balance economy increasingly based on speculation and profiteering instead of production of useful goods and services. Instead of a deficit commission, we need a commission for an industrial policy for America's physical and social infrastructure."

    I reblogged it here:
    http://ohm.typepad.com

    Posted by Ohm, 11/17/2010 9:22pm (4 years ago)

  • "Only a mass movement - with letters, phone calls, and demonstrations - can put the focus where it belongs: extending unemployment benefits, funds to states and cities to stop the wave of layoffs, and enacting a new stimulus program."

    Yes, but ONLY if people are ready to finally withdraw their support from the Obama administration, and start opposing him -- even if that means a GOP presidency come 2012. Otherwise, it won't mean a thing.

    You don't mention it in your article, but the fact is that Bowles and Simpson were appointed by Obama hmself. It's HIS deficit commission. They're in place to do HIS bidding. Their proposals are HIS proposals.

    We've got to stop ducking the truth about this stuff. Obama wants to go down in history as the man who finally erased the legacy of the New Deal. He wants the credit for taking it all away from us -- something no Republican has been able to achieve.

    If we're to have any hope of defending our interests, here's what we have to do:

    1. Deny him cover. Unions and everyone else at the grassroots level should refuse to go to bat for him in any way, and any issue. When he's attacked by the GOPers, who cares? Just leave him hanging.

    2. Continually pressure our representatives and senators to obstruct his agenda in Congress. Show that he has little pull, politically speaking, and weaken him further in the eyes of the world. The idea is to do as much damage to him as possible, regardless of the issue at hand.

    3. In spite of his likely renomination, put up a Democratic primary challenger in 2012, and keep the heat on til August. Focus on his deficit commission, his bailouts, unemployment.

    4. Coalesce behind a third party challenger to run on the left.


    There isn't any other reasonable way interpret what's happening, or what our choices are. Unless we're ready and willing to end the political career of ANYONE who tries to do what Obummer is trying to do, then the Social Security thing is a done deal. And through our weakness and wishful thinking, we will have let it happen.

    Posted by Trailer Trash, 11/16/2010 4:09pm (4 years ago)

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