The Big Fix (Hold on to your Wallets)

The drumbeat about deficits has reached deafening levels. The president warns about "out of control" spending. Fed Chair Ben Bernanke calls for bringing deficits down. The opinion pages bristle with rants about the U.S. turning into Greece, headed to default. Next week, the first session of the president's "National Commission on Fiscal Responsibility and Reform" will convene. The next day, shamelessly, the two co-chairs and the staff director (all committed deficit hawks) will grace a forum sponsored by the Peterson Foundation, established by Wall Street billionaire Pete Peterson largely to gin up hysteria about America's long term deficits.

Premature Ejaculation

This potion is being served long before its time. Sure, deficits are big and the projections are scary. But the economy is struggling to get out of a big hole. Unemployment is still near 10%. Foreclosures are still rising. Banks aren't lending; businesses aren't hiring. Deficit spending is critical to what little growth we've seen.

The president and the Congress should be focused on jobs, not deficits. Ironically, when pushed, most of the purveyors of the hysteria agree. Bernanke admits we shouldn't roll back the spending too soon, and is keeping interest rates (for the banks) near zero. David Walker, head of the Peterson Foundation, agrees deficits might be larger in the short run to create jobs and help get the economy going. But these cautions can't be heard amid the clamor about deficits.

The Elite's Big Fix

Consider this another example of Naomi Klein's "shock doctrine." Not wanting to let the crisis go to waste, an elite consensus is congealing on how to bring the deficits down.

Call it the big fix. "Everything is on the table," we're told. That's code for a trade-off. Republicans accept tax increases; Democrats accept spending cuts.

But the fix is in the details. On the revenue side, the favored vehicle is a value added tax (VAT). The VAT is essentially a hidden sales tax, levied at each stage of a product's production. Conservatives, who, unlike Dick Cheney, believe deficits matter, accept it because it is regressive, taxing spending, not investment or wealth. Liberals accept it because it is hidden, and could generate a lot of revenue.

The debate has already begun around the VAT. John McCain, in his new guise as conservative partisan, brought a resolution to the Senate denouncing the VAT as a "massive tax increase that will cripple families on fixed income." Eighty-five Senators voted for the non-binding resolution, including all six members of the President's Commission. The administration has since denied that it has any designs on a VAT. But these protestations are simply reflections on how serious the move towards a VAT has become.

On the spending side, cuts in Social Security, Medicare and domestic spending are targeted. The Republican co-chair of the President's Commission, former Senator Alan Simpson is an infamous scourge of Social Security. The Democratic co-chair Erskine Bowles favored the Clinton effort to privatize it. The deal is foreshadowed by the president's budget which calls for a three year freeze on domestic discretionary spending, and "pay-go" limits on entitlements, insisting that any increase in entitlements be paid for.

All this is wrapped in gauzy poll designed packaging. A VAT will sold as a corporate tax reform. Entitlements, we're told, must be brought under control as the boomers age. Domestic spending is rife with waste, fraud and abuse.

Stuff and Nonsense

There's only one problem with this consensus -- it is both wrong-headed and dangerous. It ignores how we got into this hole, is blind to the challenges the country faces, and offends the values that made this country great. Here's a little common sense:

1. Ignore False Prophets

As Dean Baker has pointed out, the elite deficit agenda is being peddled by the same folks that profited from the bubble bust economy that drove us over the cliff. Wall Street moguls Pete Peterson and Robert Rubin, leaders of the effort, have preached against deficits for years, arguing that they would eventually lead to recession. They never uttered a word about the housing bubble, the financial casino, the excesses and frauds of Wall Street that actually blew up the economy. They made a lot of money along the way. But their profits don't make them sound prophets.

2. Get the Question Right First

The question isn't how we raise taxes, cut spending and balance the budget. The question is how we return to an economy of full employment with a broad and prosperous middle class. If we create a prosperous and growing economy, wages will go up, revenues will go up, spending on unemployment and misery will go down, and budgets will come into greater balance. Growth is an essential precondition to sound finances. We last had debt of this size relative to the economy at the end of World War II. We invested in the GI Bill and educated a generation. We built the interstate highways. We transferred war industries to private companies. We launched the Marshall Plan, and created markets for products in Europe. And we grew our way out of the debt burdens over time, as we built the middle class society that was America's pride.

3. Wrong diagnosis, wrong remedy

To understand what remedy is, you've got to have a clear view of what the problems are. The irony of the elite consensus is that in every particular, it ignores the problems we face, and calls for remedies that would make things worse.

Consider:

We don't have an "entitlements problem." Social Security is in surplus and, if the economy grows and workers capture a fair share of the productivity they help generate, Social Security will be in surplus as far as the eye can see.

We also don't have a "Medicare problem." We have a broken health care system. The source of virtually the entire long term projected deficits comes from soaring health care costs. We're spending 50% more than other industrial countries per capita and getting worse results in terms of good health. The new health care reform does offer some hope of reducing the rate of cost increase. A single payer system -- extending Medicare to all - would do far more. But the problem isn't entitlements or greedy geezers, but a broken health care system.. Cutting Medicare and Social Security won't solve that problem.

Consider:

We now suffer Gilded Age inequality. The wealthiest 1% of Americans not only pockets 21% percent of the national income; they hold more than one-third of the privately held wealth. Plus they've enjoyed the largest tax cuts over the last decades. IRS figures show that the wealthiest 400 Americans -- averaging over $263 million in income in 2006 -- now pay taxes at a rate (17%) lower than their chauffeurs.

Yet the elite consensus is pushing a VAT that will burden the working and middle class far more than the wealthy. Instead we should be talking about increasing top end tax rates, taxing unearned income at the same rate as earned income (last done when Reagan was president), and cracking down on tax avoidance schemes, levying a speculation tax on short-term financial speculation, reviving the estate tax. And of course, we need to set a "price on carbon," a regressive tax no doubt, but one that at least is focused on taxing spending on what we need to reduce.

Consider:

On the spending side, we spend almost as much on the military as the rest of the world combined. We spend more to defend South Korea than the South Koreans do. We police the world and maintain an empire over some 750 bases. And, the military is by far the largest cesspool of waste, fraud and abuse in government. The Defense Department's books are in such disarray that none of the services can be audited, much less pass an audit.

At the same time, we have a debilitating domestic public investment deficit that is rapidly getting worse. As the president has said, we need to build a new foundation for our economy. And that requires investing in education and training so our children get the best education in the world; investing in research and development so we remain on the cutting edge of invention and science; building a 21st Century infrastructure - from a smart electric grid, to fast trains, cutting edge broadband, and renewable energy. And we've got to rebuild a basic infrastructure - from schools to sewers to bridges - that is aged and literally falling apart. Sure, if the Congress is ready to take on entrenched interests, we can cut a lot of fat out of domestic spending (consider subsidies for Big Oil, Big Agra, and Big Pharma for starters), but in the end we should be spending more, not less on vital domestic investments.

So it makes no sense at all to focus on domestic spending cuts, and leave the military off the table.

Beware Bipartisan Blight

Most Americans want the two parties to work together to solve problems. But when the parties come together to do something big, Americans should be particularly vigilant. Too often, that reflects a strong elite consensus, willing and able to purchase support on both sides of the aisle.

The elite consensus described above already has a lot of momentum and money behind it. You'll see publicists from AEI on the corporate right joining those from the Center for American Progress, on the center-left. Clinton's former Treasury Secretary Robert Rubin joining Nixon's former Commerce Secretary Pete Peterson. Editorial boards will echo established authority.

But trust your common sense. The reality is that they have it wrong. If we follow their advice now, we're likely to suffer a renewed recession. And their prescriptions will make America more unequal and less secure. We'll continue to squander resources across the world, while failing to build a sound foundation for the future at home. America's broad middle class, the pride of our democracy, will continue its decline. And our politics and our lives will get nastier and more brutish.

This post is part of the two-week long Virtual Summit on Fiscal and Economic Responsibility for People Who Did Not Wreck the Economy,, hosted by Campaign for America's Future.

 

Follow Robert L. Borosage on Twitter: www.twitter.com/borosage

Comments

[BearIy Here]

07:49 PM on 05/29/2010

Why is it that people who want to keep what they earn are called greedy. But those who want to take it away from them and spend it on themselves never get labeled greedy? Just a thought.

[procrustes13]

12:43 AM on 05/31/2010

What is it to "earn"? To hold the lever, to decide how money is divvied up as the super-rich do, and say "most to me", that's not earning, that's being greedy.

[TongoRad]

12:23 PM on 05/29/2010

Well, since Obama's turning out to be Bush III on steroids, we can kiss social security goodbye.

[Acharn]

06:20 AM on 05/29/2010

Every paragraph is dead on target! Absolutely right! So you must understand no "SERIOUS" pundit will consider your statement worthy of consideration. Both parties have already decided to screw us. We need to fight as hard as we can, but I think we're doomed Obama has already decided.

[bobwalters]

10:30 PM on 05/28/2010

Part 2. In those states, as well as the United States, the bankers own the country's government, quite literally, as those central banks control the supply of money/currency that can circulate in a national or international economy. When a nation abrogates sovereignty over its own currency to a bank, it virtually loses its political and social sovereignty as well. It is then at the mercy of the central and coordinate banking cartels, which are run for private profit, rather than as a resource service to the nation-state. It is only within the last decade or two that central banks have largely become "global financial institutions" and, via such proxies as IMF/World Bank, begun to more blatantly and visibly flex their powers to extort nation- states to engage in "austerity" programs designed to benefit the rich -- owners of banks -- and to impoverish the remaining populace to the point where they will be unable to mount effective resistance to continued pillage and rapine of their labor and resources. While most of our military and police forces are indoctrinated to believe they are "serving to preserve the Constitution, our nation's freedoms and representative democracy, in fact they are deployed to protect the privileges and prerogatives of the plutocrats'/oligarchs' wealth and hegemony.

Sadly, noone seems to be addressing this except a tiny minority who understand it. I wonder why?

[bobwalters]

10:29 PM on 05/28/2010

Part 1. Regrettably, all too few people in the United States (and maybe elsewhere, as well) truly understand the workings of central banks, like the Federal Reserve. The central bank is essentially the repository of all government income, plus the "funny money" it "creates" out of thin air. The "funny money" is "backed by the full faith and credit" of the United State, which means that it's a claim on future tax receipts. The central bank thus has in its possession all tax income submitted to the government, plus a claim on future income enough to back the "funny money." The government then borrows operating funds sufficient to sustain government programs, including the military, from the central bank at interest -- that is, the government pays the central bank interest for the use of money rightfully owned by the government; e. g. its tax receipts. In short, with the Federal Reserve Banking Act of 1913, the United States forfeited its sovereign right under the Constitution to create its own currency, retaining only the right to stamp coin-money. This little known, or acknowledged fact lies at the heart of our fiscal troubles, and those of the EU and any other nation-state that has agreed to be part of the international monetary system.

[swkidder]

06:52 PM on 04/27/2010

And the 3rd Rail, the Holy Grail, and the black obscenity that lies at the heart of our budget deficits is the "Defense Budget" - the insane amount of money that this country spends defending corporate interests around the globe, invading countries in pursuit of their natural resources, and trying to make certain that "the sun never sets on our Empire."
Enough. I'm not an isolationist. I'm all in favor of working cooperatively with other nations, and pursuing foreign policies that rest on a foundation that assumes that we live in a world that is completely connected - one in which what we do to benefit ourselves should also benefit those to whom we do it.
It's time to share, and to begin with the assumption that we in the United States don't need to accumulate any more "stuff," until no child anywhere on earth goes to bed hungry.

[stevendedalus3]

02:54 PM on 04/24/2010

A good start would be price controls on healthcare and education, along with profit controls on Wall Street. Three major culprits in undermining a healthy economy.

[We Elected You]

07:00 PM on 04/23/2010

Debt and deficits matter because interest costs matter. This isn't Japan, where almost all of the government's massive bond issues have been purchased by willing Japanese households. This is America, which borrows from the Japanese, the Chinese, and most of the nations of the world to finance trillion-dollar deficits. This year we will raise $2.2 trillion in tax revenue and spend $3.5 trillion.

That's a ridiculously-large gap, despite the fact that interest rates are so low that we're only paying interest of $207 billion a year. The nation's debt WILL grow to $10 billion, very soon (in 2 years, according to the CBO), and if interest rates are at 10% (because those foreign investors become nervous about our profligacy) then we will have to pay a trillion dollars ($1,000,000,000,000) each year in interest. Interest would outstrip Medicare/Medicaid ($800 billion/ yr) to become the largest item in the budget. This scenario will unfold in the next 2 or 3 years if we do not provide the world with a road map to balanced budgets. See http://weelectedyou.org/ .

[procrustes13]

12:45 AM on 05/31/2010

The "Japan's bonds are held by patriotic Japanese and US bonds are held by suspicious foreigners" as the excuse I heard to explain the fact that the crowding out theory is disproven in Japan and supposedly still applies in the U.S. U.S. securities are always safe, when there' s a fiat currency default is impossible. The U.S. runs a trade deficit that causes many foreigners to have dollars, and they purchase securities with them. There's no crisis here.

[WantMYCountryBack]

11:09 AM on 04/23/2010

As you correctly point out, a budget deficit is not necessarily a bad thing, particularly during a recession. And we can’t keep lowering tax rates to zero. No one likes paying them but some people don’t seem to understand that they are necessary to maintain our civilization and quality of life. At some point even Republicans, if put back in power, will be forced to raise taxes. Meanwhile, it is irresponsible to keep trying to play Santa Claus by promising more tax cuts. And watch our society crumble if we continue to make deep budget cuts. We can’t keep trying to balance our budgets on the backs of our children, the poor, and the middle class.

It’s time to demand honesty about deficits and taxes from our representatives. Wake up people! We’ve been punked!! Republicans love huge deficits because they can use them to force Democrats to gut programs created by the Democratic Party to help all Americans, not just the wealthy, and damage their electoral prospects. So no matter how much the Republican Party squeals about balancing federal budgets and shrinking government, don't believe for a second they will if elected; it's not their Plan.

[WantMYCountryBack]

11:08 AM on 04/23/2010

The top income tax rate under Eisenhower, the only Republican president elected since Hoover and the Great Depression -- who would be called a “socialist” by Republicans today, was 91%. Working-class American’s loved it. And every time Republicans campaigned against these programs, they lost. Democrats were seen as the givers of gifts while Republicans were the stingy Scrooges, making the lives of working people harder all the while making the rich even richer.

So Wanninski came up with the Two Santa Claus plan which basically works like this: Republican’s get the best of both worlds, playing Santa Claus twice by increasing the spending (primarily military, without paying for it) and cutting taxes when they are in power, while the Democrats look like two Scrooges, having to raise taxes AND cut vital spending to address the hoots and hollers about growing deficits during their administrations.

Wanninski also invented the theory of “supply side economics” (which George H.W. Bush rightly called “Voodoo Economics”) and gained help from Arthur Laffer to support his plan. Regardless of the fact that none of their theories ever made any sense or were ever proven to work, the Republican Party and their strategists have become masters at devising schemes to get elected. And unfortunately for us, none of these theories ever solved any problem facing the average American...

[WantMYCountryBack]

11:07 AM on 04/23/2010

Great post Mr. Borosage! You touch on ideological anti-deficit motivations (Republicans can't stand programs that help the lower classes rather than wealthy and corporations), but you don't write about POLITICAL motivation...

Have you ever wondered why, despite their cries for "small government" while campaigning and during Democratic administrations, Republicans quietly increase the size of government once elected? Have you also ever wondered why Republicans never complain about budget deficits during their administrations, only when Democrats are in control, even though Republican administrations have primarily been responsible for creating the massive deficits over the last 3 decades or so? And have you ever wondered why the solution to all of our problems, as prescribed by most Republican pundits and politicians, is always more tax cuts while the tax cuts from Democrats aren’t discussed or never seem to be good enough?

I’ve always thought this was just a simple case of hypocrisy, but it turns out they are actually following the "Two Santa Clause Theory” playbook developed by a Republican operative named Jude Wanninski. Roughly 40 years ago, he realized that it was getting harder for Republicans to win elections since Democrats got to play Santa Claus through New Deal programs with their “big government” projects like building roads, bridges, and highways. To pay for these programs, they raised taxes on the rich which didn’t seem to affect working people (wages steadily rose, in fact)...

[maglindracia]

04:36 PM on 04/22/2010

My last comment for some reason would not place itself where i was trying to put it, I was responding to someone earlier who said that 250k was not really very rich at all.

At any rate, this was and excellent article, and i wish i could glue it to the end of my congresspeople's noses until they had seen it so many times they actually absorbed something useful.

[maglindracia]

04:26 PM on 04/22/2010

Hardly rich? well, maybe, but consider that in our three adult household, with two job holders, we have a total income of 35k a year. That includes people who have their AAs plus some college and one person with a very good degree from an school top in his field. Yes, we have two people employed and one on disability (me, I get a whopping 40 bucks a month because my husband has a job). No one we know of personally has a job over 100k a year,even with two incomes. What they do for a living varies widely, and includes people with government jobs, tech jobs, service industry jobs, health care jobs..... and they all work their butts of, and nearly all of us live payday to payday.

I honestly don't have any idea what i would do with 250k a year, though i imagine we would have our first vacation ever in 14 years of being married.

250k in my world, right here in middle America, is a shitload of money. Its maybe not disgustingly rich, but its a LOT. No one who makes that much money, barring radical medical catastrophe, should ever be hurting for anything, including retirement later or education for their kids, let alone basic living.

[Devaron Namsaar]

11:06 AM on 04/22/2010

The history of this world reveals the corruption and evil that has always cost lives and fortunes of the little people. Today's lesson is no different. Ultimately what happens to empires of corruption is that they end, the leaders are all killed and the system starts over. I suspect the end is coming and of course no one in power really sees it.
I have seen the power of nature level the playing field of man in just a few moments... Can that happen here in America, or England, Japan, Germany or Belgium? Yes, absolutely!
The truth is, all of this world can change in the twinkling of an eye... and I believe the best is yet to come. I believe in 50 years none of the people, none of the corporations and none of the issues that exist today will exist at all.
For all their evil and corruption and murder these people, these corporations and the issues of today will be no more then the dust.
The message I send to these people and corporations is this: As indestructible as you believe yourself to be, the truth is you can be gone in a moment along with all your friends, families, dogs and cats... All your wealth and corruption won't buy you one moment of protection or immunity... your arrogance is the only thing greater than your ignorance.

[Devaron Namsaar]

10:45 AM on 04/22/2010

The history of this world reveals the corruption and evil that has always cost lives and fortunes of the little people. Today's lesson is no different. Ultimately what happens to empires of corruption is that they end, the leaders are all killed and the system starts over. I suspect the end is coming and of course no one in power really sees it.
I have seen the power of nature level the playing field of man in just a few moments... Can that happen here in America, or England, Japan, Germany or Belgium? Yes, absolutely!
The truth is, all of this world can change in the twinkling of an eye... and I believe the best is yet to come. I believe in 50 years none of the people, none of the corporations and none of the issues that exist today will exist at all.
For all their evil and corruption and murder these people, these corporations and the issues of today will be no more then the dust.
The message I send to these people and corporations is this: As indestructible as you believe yourself to be, the truth is you can be gone in a moment along with all your friends, families, dogs and cats... All your wealth and corruption won't buy you one moment of protection or immunity... your arrogance is the only thing greater than your ignorance.

[RUKidding0]

11:13 AM on 04/22/2010

... but, as you indirectly pointed out in your somewhat fatalistic interpretation of history, any replacement regime will be as corrupt, if not more so, than the one that is replaced, costing still more of the "lives and fortunes of the little people".

Moreover, with jets and no shortage of unextraditable sanctuaries, you're threat against the rich and powerful is a hollow gesture. Like those who look to heaven for justice, you are looking to historically derived karmic retribution. I suggest that there are more constructive and immediate answers.