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Fiscal Folly

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The Peter G. Peterson Foundation is sponsoring a "fiscal summit" on April 28 to reinforce what has become the standard narrative about the perils of the deficit and the debt. In this storyline, the most dire peril facing the economy is the increasing public debt. Of course, the more immediate problem is the high unemployment rate, the risk of a largely jobless recovery, and a lost generation of prosperity.

We finally blasted our way out of the Great Depression by using the monumental deficit spending of World War II to put Americans back to work and recapitalize US industry. We did not use budget austerity to produce the wartime and postwar boom - quite the opposite. Then when prosperity returned, high growth made it easy to return to fiscal balance and pay down the war debt.

Here is an extract from the announcement:

"[T]he 2010 Fiscal Summit: America's Challenge and a Way Forward ... will take place in Washington, DC on April 28, 2010, featuring a moderated discussion of the issues with President Bill Clinton. We will send a more detailed agenda shortly, but we hope that you will save the date and plan to join us for this important forum.

The purpose of this event is to further a national dialogue on solving America's fiscal challenges through several moderated discussions with leaders on the issue from across the political spectrum. In addition to President Bill Clinton, who will be interviewed by George Stephanopoulos, we will hear from a range of experts, including Paul Volcker and Alan Greenspan, Former Chairmen of the Federal Reserve; Bob Rubin, Former Secretary of the Treasury; Alice Rivlin, former OMB Director and Member, National Commission on Fiscal Responsibility and Reform; Senator Judd Gregg (R-NH), Member, National Commission on Fiscal Responsibility and Reform; John Podesta, President and CEO of the Center for American Progress; John Castellani, President of Business Roundtable, and others."

This is such a travesty that it's hard to know where to begin.

For starters, note the prominent role of Robert Rubin and Alan Greenspan. If any two Americans are responsible for the economic, financial and fiscal mess we're in, they are Rubin and Greenspan. Much of the rising deficit, after all, is the result of the financial collapse. The main reason for the big deficits is that tax revenues are down in a severe recession. The financial collapse also required the government to step in with increased public spending.

If the orgy of financial deregulation that led to the crash had two prime sponsors, the Democratic one was Rubin and the Republican one was Greenspan. Inviting these characters to a fiscal summit to devise a way out of the crisis is like inviting arsonists to design a seminar on fire prevention.

Peterson himself, who underwrites the work of the foundation with a billion dollar gift, made his money as one of America's private-equity moguls. Private equity companies have been among main offenders in the world of shadow banking that helped cause the collapse, and are now lobbing against tough financial reform and regulation.

Note also the courtesy title, "President Clinton." The last time I checked, Clinton ceased being president in January 2001 and Barack Obama is America's only current president. Clinton signed several of the deregulation laws promoted by Rubin and Greenspan that led to the collapse, which in turn produced much of today's fiscal hole. I wonder if Clinton is doing this pro malo, I mean pro bono, or if Peterson is paying him one of his Clinton's usual six-figure speaking fees.

This is billed as a "national dialogue on solving America's fiscal challenges," but spare me. This is a propaganda event. For the most part, the featured speakers follow the Peterson line. John Podesta, the closest thing to a liberal playing a headliner role, accepts that there is a serious deficit problem, but would entertain a value-added tax as part of the remedy. But the speakers' list is clearly stacked and there is no one to Podesta's left.

The Peterson Foundation and its president, David Walker, already know exactly what they want -- strict budget caps on social outlay, enforced by a rigid formula, with cuts in Medicare and Social Security leading the way. Walker, whom I have interviewed and debated, is willing to include tax increases as well as spending cuts, but most Republicans are not.

This reality will make it politically difficult if not impossible for either the new national commission on fiscal reform (which is a twin of the Peterson agenda) or the Peterson Foundation itself to succeed with its plan to put the budget on autopilot and extract deep cuts in social outlay. But in the meantime, these maneuvers do serious damage to the recovery effort, by making it politically more difficult for President Obama to even consider the kind of public spending that the economy needs to get back on the track to broad prosperity.

Obama himself has contributed to this trap by creating the presidential commission, a clear majority of whose members are deficit hawks. There are just four liberals out of the commission's 18 members. Its executive director is Bruce Reed of the Democratic Leadership Council, home of the Democratic Party's corporate faction. The Peterson summit comes a day after the official commission's opening meeting April 27.

Because Walker has been so deft at including bipartisan deficit hawks, and at cloaking his attack on social insurance as a crusade for the public good, he gets a very respectful press. Part of his storyline is that if so much money were not being spent on the aged, there would be more money for the young and for other social needs. But when legislative efforts are made to increase outlays for early childhood, or for college aid, or for family supports, or labor-market spending the Peterson Foundation is missing in action. Children are handy only as poster children for the attack on Social Security and Medicare.

It's worth a look at the Peterson Foundation's website, which is one part fiscal fear-mongering and one part homilies about thrift so syrupy that they would make Polonius blush. If you want the counter-argument, have a look at fiscalhighroad.org, a partnership of the Economic Policy Institute, Century Foundation and Demos (where I am a part time senior fellow.) Another good resource is the Scholars' Strategy Network, founded last year by Harvard's Theda Skocpol.

Basically, the counter-story goes like this: Yes, we will have a national debt problem if we don't get a return to high growth soon. But the more immediate problem is restoration of prosperity--and in the near term that will require more public outlay, not less. Once a real recovery is on track, we need to increase progressive taxation, both to moderate deficits and to pay for sustained public spending on things the economy and society need, such as 21st century infrastructure, a green economy, good jobs, as well as a national health and pension system.

We need a national debate on this basic choice, with equal prominence for the folks who want to gut social spending and deliver austerity, and those who propose a high road to fiscal stability. But nearly all the resources and the largest megaphone are on one side of the debate. Peterson's April 28th event should be the occasion for counter-argument, and no small measure of ridicule for the proposition that anyone should take the likes of Alan Greenspan, Robert Rubin, or Pete Peterson seriously as fiscal prophets.

Robert Kuttner's new book is A Presidency in Peril. He is co-editor of The American Prospect and a senior fellow at Demos.