The New Red Ink Scare
We've got a new red scare. Forget Glenn Beck, the fear isn't that America is going red, it's that it is in the red. Conservatives in both parties are raising alarms about deficits and government spending. Well, get over it. If we are going to generate growth and shared prosperity out of the mess we are in, expanded public investment must be a centerpiece of the new economy.
In today's Washington, this verges on heresy. The chattering classes are raising a clamor about Obama's deficits. The growing fixation, fanned by conservatives in both parties, may well cripple any short term recovery. Worse, the wrong-headed debate could well undermine the reforms vital to the new economy we need to build out of the ruins of the old.
Both parties still pay tribute to false idols that should have been discarded in the recent economic collapse. Republicans rail against everything Obama, chanting, "Where are the jobs?" while calling for rolling back the stimulus, abandoning health care reform, cutting spending and, no surprise, more tax cuts. They seem to have learned nothing from the crisis. Sure, they claim that they have put aside their fiscally wastrel ways, blaming it all on Bush, and have become born again fiscal conservatives.
But this leaves them in the bizarre posture of arguing that "deficits don't matter" when the economy is growing, but are unacceptable when the economy is sinking. Step on the gas when the economy is already racing and on the brake when it is sputtering. The perpetually tanned leader of House Republicans John Boehner clearly believes that Americans have neither memory nor common sense. The continued high disregard that most Americans have for Republican legislators suggests otherwise.
But conservative Democrats of various ilk -- the corporate New Dems, the old boy Blue Dogs -- echo the Republican fears, using the recession-driven deficits to revive their efforts to force cuts in "entitlements" (read: Social Security and Medicare). This is both bad policy and bad politics.
In reality the world has changed. In the old economy, Americans took on more and more personal debt, and America ran up more and more global indebtedness, as we served as the world's consumer. That era was based on growing household debt, stagnant incomes, Gilded age inequality, and inflating asset bubbles -- first the dotcoms and then housing. It's over. Sure the banks, bolstered by literally trillions in subsidies from the Federal Reserve and Treasury, are setting up the casino again. But Americans, sobered by trillions lost in the value of their homes and savings, aren't binging anymore.
In the short term, as consumers cut back, businesses are laying off workers, foreclosures are continuing, bankruptcies are up. States and localities are cutting services and workers, and face staggering deficits again next year. Fifteen million Americans are unemployed -- and the number keeps rising. Only federal deficit spending and the unprecedented monetary policies of the Fed have staved off a deeper depression.
The problem with Obama's stimulus is that it is too small, not too big. We'd be wise to spend more to forestall layoffs at the state and local level, to put people directly to work in urban corps and green corps, to add to public construction projects, to extend unemployment benefits, food stamps and other income supports.
Instead the deficit mania seems likely to force a stealth stimulus at best, done piecemeal and half-assed. The Congress will hopefully extend unemployment compensation in the hardest hit states. Some spending will be boosted in annual appropriations. To quiet conservative yapping, various tax breaks are increasingly bruited about -- $250 for every Social Security recipient, the unproductive tax credit for first time home buyers, and worst of all, the goofy jobs tax credit for businesses (2/3 of which will subsidize businesses for jobs that would have been created anyway and most of the rest will go to those who game the system).
But the most destructive effect of the red ink scare could be on our long term growth strategy. With consumers cutting back and businesses understandably reluctant to invest without increasing demand, expanded public investment is vital to generate demand, growth and jobs. (For a more detailed versoin of this argument, see economist Thomas Palley here.)
We need to rebuild America. For too long, we've starved investment in the areas vital to our future -- in 21st century infrastructure, in research and development, in education and training. Vastly expanded investment in modernizing the electric grid, extending and accelerating broadband, building fast trains, replacing collapsing water systems, doing just the basics in education from pre-K to sophisticated worker training would generate jobs, fuel growth and produce a far more productive private economy. The American Society of Engineers tallies up over $2 trillion in investment needed just to bring our core infrastructure up to passable levels. That says nothing of building the next generation base essential to a high wage society in a global economy.
Moreover, public investment is central to moving from a policy unleashing Wall Street speculation to one rebuilding Main Street manufacturing. Less of public investment tends to leak abroad. We can use our purchasing power to encourage companies to bring the best technology here, and help bring the supply chains with them. With the energy and environmental costs of transport rising, buying and supplying locally already has momentum. And with a concerted investment agenda in new energy, we can insure that America is a leader in the new green industrial revolution. All of this in turn can help us move to a more balanced trade policy even as we engage China and the other mercantilist nations in multilateral efforts to rebalance the global economy.
Much of this investment sensibly should be financed, whether through public investment banks or by deficit funding. The investments will bring returns over time; and the benefits will be enjoyed by rising generations, so it is sensible they share the costs. Just as there's a difference between borrowing for a good education and running up credit card debts on Caribbean vacations, there's a difference between investing in areas vital to our future and running up deficits with top end tax cuts, military adventures and obscene drug company subsidies.
Obama's record deficit this year is the product of the economic collapse. Once the economy starts growing and people go back to work, the deficit will come down. And that need not get in the way of committing to the investments we need, so long as we're willing to pay for them over the long run. But what of the staggering long term deficits - running publicly held debt up to nearly three times the size of our GDP by 2050 - as decried by the Peterson Institute and others? There is one core reality of these fantastic projections. The great bulk of the deteriorating long term projections come from out of control costs of health care. Hold health care costs down to sensible levels and there is no problem. Fail to solve soaring health care costs and there is no solution. We can neither tax enough nor cut enough spending to pay for the projected costs of health care.
This isn't exactly radical stuff. This week in Washington, the Campaign for America's Future, which I co-direct, will host a conference featuring Ohio Senator Sherrod Brown and Pennsylvania Governor Ed Rendell from America's battered manufacturing heartlands, the CEO of US Steel and Rich Trumka, the new president of the AFL-CIO, leading economists and legislators to make this case, and lay out an agenda for action. (To follow the conference go to here.)
But Democrats are now said to be worried that the red ink scare will take its toll in the 2010 elections. Take another look. A recent poll for the Economic Policy Institute by Hart Research shows most Americans are more sensible than ideological. Over half of Americans think unemployment is the largest problem facing the country, as opposed to less than one fourth who say the federal budget deficit is. Even a majority of Republicans agrees on that. Two-thirds of the country say the recovery plan has helped, but 81% believe Obama needs to do more to address the jobs problem.
Over 60% of those polled think the focus should be on creating jobs and investing, while only 36% would focus on cutting federal spending. Now Americans don't like taxes, and think, sensibly enough, that government wastes their money. But they are looking for policies that will generate jobs and growth and make sense. That's why public investment in new energy consistently polls off the charts.
In 2010, candidates will be running with unemployment over 10% and deficits near record levels. Surely the election will turn on who is fighting the hardest to put people to work and get the economy going, not who is best at cutting the deficit.
Eventually, if we are going to have a strategy that works, we've got to make and win the case for expanded public investment over the long term, financed in part and in part paid for, once people start going back to work again, by top end tax hikes and new priorities.
We've done the whole small government, low taxes, deregulation number. We got top end tax cuts, declining wages, collapsing sewers and gridlock, a ruinous financial casino and global indebtedness through corporate trade policies. The result was growing inequality, a sinking middle class, over a fourth of America's children in poverty, increasingly destructive climate change, and a harsh financial collapse and recession. It is time to go another way.
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Robert Borosage's acknowledges his opponent's position, that deficits are bad, but the blogger never considers that deficit hawks may have a point. The blogger assumes that falling housing prices will always be worse than a growing deficit, and I have to call the blogger on not balancing the sides of his argument.
Why does it have to be absolute one or the other? Measures marked to control deficit in harmless ways comforted a lot of the "Panic" pronouncements and swirling that was going on, could have empowered a sense of structure over an otherwise un-structured situation. How can the government not see as it goes? Could you call it bright or even possible for them to not try to adjust to the situation as the situation adjusts? To use a principle dictate versus a breathing responsiveness. FDR's approach was what they had to roll with but also criticized - and it was recovery over a very marked period of time. Unemployment went from 700,000 cut a month to 200,000 a month recently. Wasn't that good news? The Doktor had good feedback - and I like Paul Krugman just the same thanks. Deficit when it's needed: that doesn't change response to conditions predicating the crash and the fervor of bailout necessity. People were cautionary about surmounting deficit before. That's not Republican and it's not Democratic. It's poor form going in, and maybe good form getting out. If the government needs to adjust as it goes, will they? Seems like it. People SHOULD be more concerned about unemployment; it's the immediate factor. Contraction was anticipated, is actively addressed. I agree, I'm curious what the plans for the Railroad system look like.
"And with a concerted investment agenda in new energy, we can insure that America is a leader in the new green industrial revolution."
That ship has already sailed. With an extreme, collaborative effort, the United States can be a player in the green industrial revolution, not a leader.
Well put - thanks!!
With respect to Robert Borosage's fine blog, the only reason the Fed can continue to buy the bonds our treasury dumps on the market is because other countries keep buying dollars. This poorly hidden secret is actually a crisis waiting to happen.
Speaking of bonds
http://www.rollingstone.com/politics/story/30481512/wall_streets_naked_swindle/4
"Naked short-selling of stocks is nothing compared to what goes on in the bond market," says Trimbath, the former DTC staffer. Indeed, the practice of selling bonds without delivering them is so rampant it has even infected the market for U.S. Treasury notes.
That's right — Wall Street has actually been brazen enough to counterfeit the debt of the United States government right under the eyes of regulators, in the middle of a historic series of government bailouts!
In fact, the amount of failed trades in Treasury bonds — the equivalent of "phantom" stocks — has doubled since 2007.
In a single week last July, some $250 billion worth of U.S. Treasury bonds were sold and not delivered.
Small government? Over deregulation? Low taxes? What rock have you been living under?
The problem with BO's plan is that the money went to the wealthy campaign contributors instead of the citizens who needed the help. SOP in DC these days.
The federal government has been in business for more than 225 and still doesn't know how to run in the black. That fundamental incompetence will not be affected by your self-motivated new spending spree. You cannot deficit spend into prosperity--at least not in this universe. If you think that can happen, you deserve a refund on your education wherever it was falsely provided.
Good thing you weren't in charge of the economy during the Great Depression.
Deficit spending (The New Deal) was exactly the prescription that assisted in pulling us out of that ditch.
From the time of FDR's inauguration until 1940, GDP grew approximately 66%... BEFORE WW2 started.
Paul Krugman, a Nobel Prize winning Economist and Professor also supports deficit spending as a means of saving an endangered economy.
Please review the chart on the following link (GDP 1020-1940):
http://en.wikipedia.org/wiki/New_Deal
Wealth is really only created by producing or refining some kind of raw material into a useful product.
What fueled the prosperity of the first half of this decade, however, was not the creation of real wealth.
To build a house that someone will buy and live in is to create wealth. To build a house that will stand unoccupied is not creating wealth, it is no different than making a tank or a bomb. Actually, the diversion of resources into producing goods that people don't want further diminishes the creation of real wealth. The prosperity of the first half of this decade was due to a frenzy of building houses that, ultimately, people could not afford to buy and own. The prosperity we enjoyed was way out of proportion to the actual wealth our economy was creating.
Free markets, that is, those that are free from government intervention, like taxes and regulation, along with interest rate and money supply manipulation, as well as public underwriting of risks, cannot and will not produce much of an oversupply of goods. In other words, a free market would never create a housing bubble or any other kind of bubble.
The false prosperity of the housing bubble was created by government manipulation of interest rates and the public underwriting of risk. Mr. Borosage would have us continue to prop up the false economy by further borrowing from our future.
Sooner or later the debt has to be paid, with interest.
Yeah right. Look what that "Free Market" did. You just don't get it. Letting rampant greed rule is what nearly brought this country down. Since you want to "outlaw" socialism, let's start with Medicare, and Social Security. Hell, let's even get rid of the VA, since they are all socialist programs. Let everyone in this country "pull themselves up by their respective boot-straps". Riddle me this? Why can someone from overseas get a gas station, boutique, liquor store, 7-11, dry cleaner, and all the other opportunities regular Americans have been denied for years? If you want to keep things the way they are, knock yourself out. Stay oppressed, and at the cusp of bankruptcy. Be just like Craig Nelson and say: "I've been on welfare, and the Government never helped me". Talk about no knowledge of government.
News flash too all supporters of Wall Street that damn-near brought this country down. All of you commenting against fixing this country by yammering Socialism, and contributing Zero Ideas, Re-read this particular paragraph, especially the First Sentence.
"In reality the world has changed. In the old economy, Americans took on more and more personal debt, and America ran up more and more global indebtedness, as we served as the world's consumer. That era was based on growing household debt, stagnant incomes, Gilded age inequality, and inflating asset bubbles -- first the dotcoms and then housing. It's over. Sure the banks, bolstered by literally trillions in subsidies from the Federal Reserve and Treasury, are setting up the casino again. But Americans, sobered by trillions lost in the value of their homes and savings, aren't binging anymore".
Read more at: http://www.huffingtonpost.com/robert-l-borosage/the-new-red-ink-scare_b_336331.html
The AP reports that the government has overstated stimulus jobs by the thousands.
Americans are unemployed by the millions. "Thousands" are an ordinary rounding error. You know, like the Declaration of Independence wasn't signed in 1776, it was signed through the summer of 1776. The effects of the program are hypothetical in any case, and it is just starting to roll. The administration's policies do seem conservative, but it is doing SOMETHING and we can still hope for a quality recovery. Government for the cronies got us into this mess, a government serving the great unwashed can still get us out.
AMEN, Mr Borosage. The public option cannot be an option because only the sick will opt for it. Virtually all of the doctors I know in all areas of specialization agree a single payer plan is the only way to go.
Until we have single payer the cost of care will continue to be unaffordable to millions more each year and more will be unable to pay for quality care--if, in fact, they are getting it now. This system will then bankrupt itself and we will have Medicare for everyone--within 4 years.
You and I disagree on government involvment. I do not want the government deciding my share I will work for it. However, if you are sincere you can have government involvment and government health care. fill out your paperwork, apply, and move to Canada or the United Kingdom. If the cost of living is too much, go to Cuba. Bon Voyage
Democratic socialism neither strips one of individual rights nor denies one private property and accumulation of riches.
Unlike the misnamed national education law under the previous president, Democratic Socialism truly means leaving no one behind.
Love it or Leave it.
What could be more stupid?
Galbraith noted that these markets were never free and that as capital became more concentrated market forces stopped working.
The top 1 percent owns more wealth then the bottom 90 per cent.
Now if that isn’t concentrated I don’t know what is.
It seems that Galbraith has been proven correct.
Another way to go is to tax the movement of moneys as Alexander Hamilton proposed. A proportional rate tax, which could be likened unto a toll, on the movement of all investment vehicles could be enacted.
For example, derivatives have had about $600 trillion in transactions this year alone. If a proportional rate toll tax were implemented that topped out at 5%, that would put $30 trillion into the treasury.
Those who sanctimoniously pontificate that they are concerned about the red ink in the budget, don't seem to have a hankering for Hamilton's idea.
Hamilton seems to have gotten this idea from Adam Smith, the father of capitalism, in his book, "The Wealth of Nations."
So the anti-red-inkers will just have to wring their hands, don their sackcloths and ashes, get their scraping shards out and bemoan the fact that they are clueless on how to reduce the deficit.
They could better spend their time reading the Federalist Papers or Adam Smith's tome.
"For example, derivatives have had about $600 trillion in transactions ... that would put $30 trillion into the treasury." (shortened for space)
This is an example of extremely faulty math. This assumes that none of the 5% that was taxed was actually removed from the money supply, and was then available to be taxed again. A more (but still not very) realistic way to look at this would be to assume there was $30 trillion in money, which was sold 20 times in a year to make $600 trillion. Now if that $30 trillion were taxed at 5% for each of those 20 sales, it would be down to $11.3 trillion by the last sale. And you would only raise $19.25 trillion in taxes. This still seems like a lot. But a 30 trillion transaction is also not very realistic. And the smaller the transactions get, the less revenue would be collected by the tax. (Another calculation with $10 trillion transaction sizes only nets $9.5 trillion. If you were to run this with actually realistic transaction sizes, the amount of revenue collected would be minuscule in comparison to your estimate. And this all neglects the chilling effect on transactions that the presence of a tax would create.
This is the point that many people seem to not understand. Once money is taxed and taken by the government, it is not available to create more wealth. You can't simply rely on $A x B% = government revenue.
Once money is taxed and taken by the government, it is spent by the government and becomes available to create more wealth. So taxes tend to be a wash so far as promoting the economy is concerned. What picking up taxes to balance the budget does do is to avoid unsubstantiated printing of money to cover government costs. This way the value of the dollar is protected. A stable dollar lends itself to longer range planning since wages and prices will remain predictable numbers.
This would be nice but it is not so important as maintaining the health and vigor of the nation. So, we have to spend on health care, on nutrition and shelter, and on education. Infrastructure and the environment follow almost of themselves. While taxes should be sufficient, it is not critical that they are. Since the most people are of the bird in the hand persuasion, it is just as well to pander to them so as to be able to effect our larger ends. This squelches those who think taxes cuts are an unalloyed good and people of such bad judgment should be kept away from the reins of power at any cost.
The OP is 100% right.
Stimulus works in China, but not here?
Even FDR did not do enough to really get the country going again.
Only the deficits that were run in association with WW2 were large enough to really get the country out or the slump.
However if we pour stimulus into the country with the drain still open it will only flow overseas.
Wall Street has loaned our pension fund savings to hedge funds that stripped companies of assets and shipped the production overseas since Reagan.
Along with stimulus, we need to outlaw leveraged buyouts/hostile takeovers of companies. So the stripping of jobs and productive capacity for the profit of Wall Street connected hedge funds does not continue.
For a primer on how businesses were stripped see this:
http://www.nytimes.com/2009/10/05/business/economy/05simmons.html
I love it when the conservatives are in opposition and they complain about debts & deficits...why not try reducing them when you're in power next time? I mean, it's not like they forgot to do it the last two times they were in the White House, did they? Oh wait, they did forget.
I'll believe the conservatives talk about debts & deficits when they put it into practice thank you very much.
We have done the whole small government. You must be kidding. When was the government small?
Also, how much of that $870 billion in stimulus money has been put to work?
Clinton shrank the government by about a quarter. I do get an impression that the considerable share of the stimulus money is being held back as its investment is still being plotted. While Bush did increase the size of government and government expenditures, actual services seem to have been reduced.
That doesn't seem to make any sense, but we have the example of the Iraq war where mercenary forces are of a size that compares with the organized troop force but at a much greater cost. Some insiders made out very well indeed.
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