The debt crisis is a hoax, but the sequester is for real, and so is the underlying cause of this entire mess: The Wall Street crash of 2008.
We need to fight off financial Alzheimer's and remember how we got here.
When Wall Street imploded under the immense weight of its own greed, it tore a gaping hole in the economy. After years of packaging and selling highly profitable high-risk, mortgage-related securities, (rated AAA, of course, by the ever pliable rating agencies), these fantasy financial instruments turned into junk. No one knew for certain who held how much financial trash, so lending ground to a halt, which in economic terms is like giving the economy a heart attack. Nine million workers lost their jobs in a matter of months due to no fault of their own.
As jobs and businesses disappeared, tax revenues plummeted while government costs, related to rising unemployment, skyrocketed. As state and local revenues collapsed, another 500,000 public employees also lost their jobs, leading to further declines in tax revenues and further increases in unemployment expenses. The Great Depression II and it's downward spiral were upon us.
To save the economy from further devastation, in 2009 the federal government passed a $787 billion stimulus program, a modest amount given the trillions of dollars of damage caused by the Wall Street crash. The stimulus program, along with the easy money policies by the Fed, prevented further collapse and eventually sparked a tepid recovery. Yet over 14 million workers still are unable to find full-time employment.
The combination of the economic collapse and the deficit spending needed to counter it increased the national debt. Before the crash in 2007, the yearly deficit was 1.17 percent of GDP. By 2009 it shot up to 10.13 percent. Even with a weak recovery, the deficit fell to 8.51 by 2012. (The government projection for 2017 is 3.01 percent.) It's perfectly clear that these deficits are the direct result of the crash and the tepid recovery. You can't pin the increased deficits on Medicare, Medicaid, Social Security or domestic discretionary spending.
So Why Austerity Mania?
1. The jump in government spending gave the anti-government phalanx a golden opportunity to scare the public.
As Paul Krugman has pointed out repeatedly, every argument used about the debt was false. The austerity crew claimed that the debt would run up interest rates and cripple the economy. Rates instead are near zero. They said it would trigger inflation. We have too little. They said it could turn us into another Greece. But of course, we can never go bankrupt because we have our own currency. (Unless the bankruptcy is artificially caused by the Republican's failure to increase the debt ceiling.)
But the facts didn't matter. Debt hysteria groups, largely funded by billionaire Pete Peterson, saw an opening to push their anti-government agenda by playing upon the pubic's concern about debt of all kinds. They also played to the xenophobic fear that China will ruin us because it allegedly holds so much of our debt, (It actually comes to only 8 percent of all the outstanding U.S. debt).
2. Debt Mongering Works:
It's hard for the average American not to worry about debt. After all Wall Street used the last 30 years to encourage Americans to go deeper into debt. In 1985, the average household debt was 66 percent of its income. By 2006, it was 127 percent. When the economy crashed that enormous debt load became a clear and present danger to households and individuals. So it's hard not to project that fear onto government debt, even if there are no meaningful parallels. A household can not avoid bankruptcy by printing its own money to pay down its debt. The government can. A household cannot create jobs to increase its family income. The government can. A household is supposed to save for the future. The government is supposed to invest in its people and infrastructure to build for the future. But whenever fear confronts fact, fear usually wins.
3. President Obama caved in to debt hysteria:
In the wake of the Democratic 2010 election debacle, President Obama, I believe, made a serious error. He legitimated deficit hysteria by freezing government employment and salaries. He then compounded the problem by offering a "grand bargain" of tax increases for the rich and cuts in social programs including Social Security. By doing so, the President was admitting that the phony debt crisis was real. The entire debate shifted from how best to put our people back to work, to what should be included in the grand bargain to cut the deficit. The sequester was but a minor move in that two-step to the right.
4. The Ayn Rand Republicans control the debate:
Once the president accepted the Republican terms of debate, the Ayn Rand wing -- the taker-maker gang who see working people and the poor as moochers -- realized they had no need to compromise. The more they held out, the more liberals had to come their way. This was their golden moment to destroy as much of government as they could because in their playbook, government by definition is evil. Facts don't matter in this discussion. It's all about faith, values and conviction.
5. Occupy Wall Street Vanished:
We can now say for certainty that Occupy Wall Street shifted the debate in the Fall of 2011. President Obama's "grand bargain" was eclipsed by the 99/1 percent meme. The protest tapped into the public's disgust over what Wall Street had gotten away with -- the obscene pay scales -- the reckless gambling -- the bailouts -- the outright financial lawlessness and cheating. For the first time since the crisis started, a mass uprising put the blame on Wall Street and the super-rich.
But the uprising could not sustain itself. Once the encampments were removed, it only took a few months for the conversation to return to austerity -- how all of us moochers need to tighten our belts. The liberal position became one of "balance" -- some tax increases on the wealthy combined with cuts in social programs for the rest of us.
Aren't the Republicans the real losers?
Yes, we hear much about how bad all of this is for the Republicans -- how they are losing the young, women and the growing Hispanic population. Maybe so. But a Democratic president and his party have accepted the need for cuts in social spending to make up for economic problems caused by the Wall Street crash. No matter how the sequester and upcoming debt limit battle ends, government spending will be cut, even though we need much more government spending to put our people back to work. Together, the Republicans and the Democrats have virtually eliminated a true progressive position from the debate.
Is there an alternative?
We need to reframe the debate yet again. Wall Street should pay for the damage it created. They owe us. That money should be used to put Americans back to work by rebuilding our infrastructure, insulating our homes and businesses, and by paying tuition for Americans who want and need higher education.
To make such a message work, we will need a sustained movement that operates outside the confines of the two parties -- parties that incessantly seek Wall Street's largess, (Yes, there are a handful of exceptional Democratic and Independent fighters.) Americans are fed up both with Washington and with Wall Street. They will be even more angry when events prove that austerity doesn't work, and that Wall Street is still out of control. Get ready.
Les Leopold is the executive director of the Labor Institute and author of How to Make a Million Dollars an Hour: Why Hedge funds get away with siphoning off America's wealth (Wiley, 2013)