In a prior OpEdNews
piece, I argued broadly that austerity in the face of a recession is
counterintuitive. It is wrong-minded to focus on the deficit as this is just
tantamount to taking one's eye off the ball. The focus here needs to be on growing the economy. For instance, why
does anyone respond to rising unemployment by firing workers as many governors
around the country did? One has to assume that otherwise smart people are
pursuing a hidden agenda when they threaten to go over the fiscal cliff if they
don't get what they want. Ironically, they pledged Norquist never to raise
taxes, but if they can't agree to raise taxes on higher taxes on the top two
percent of taxpayers--and if President does not flinch--then Taxmageddon, i.e. on
December 31, 2012 everybody's taxes rise by default on January 1, 2013. That
is, the Bush tax cuts will expire. In that event, the signers to the Norquist
pledge avoid being punished for there is safety in numbers. Grover Norquist
cannot punish all the Republicans in Congress that offend him. But he has subliminally threatened to
punish Republicans who would dare vote to raise taxes.
Some people have no love for Medicare,
Social Security Insurance, or Medicaid. They call them entitlement pejoratively
even though workers make FICA payments that support them. But opponents of
these programs that primarily benefit the poor and the middle class--labeled
takers and moochers--see them as spreading debilitating socialism insidiously across
this country. Rep. Eric Cantor, Gov. Mitt Romney, Rep. Paul Ryan, want to
undermine--euphemistically, save--these social programs. Euphemisms like
privatize and "entitlement reforms' are willful attempts to obfuscate their
real motives. Fiscal cliff debate stalemate is another installment in the ruse
by Republicans to tie higher taxes on the top two percent of the taxpayers to
concessions on spending--cutting Medicare, SSI and Medicaid benefits.
This is sort of what the Europeans are
doing and I hope we don't follow them over the cliff. What is going on in the
U.K., Greece, Spain, Ireland, and Portugal could happen here. In four years,
Europe has devolved into another recession because they are stubbornly insisting
on austerity. It does not seem to occur to them that their attention should be
on jobs and economic growth rather than on deficits. I have consistently
maintained that faced with a recession rather than exacerbating it with layoffs
of police, teachers, firefights, slaying unions, defunding of Planned
Parenthood, PBS, etc., governors and Congress need to encourage employment. If
you don't the economic downturn gets more severe. But ideology and politics
never take a nosedive in bad times. If anything they get reinforced. And
political operatives recognize that recessions are good for the party out of
office. They can be used as counter foils against the party in power. That is
why Mitt Romney kept repeating that "Obama did not cause the recession but he
made it worse." He said this ad nauseum but his charge obviously didn't get
much traction because it was false. This is why when the unemployment rate fell
below 8 percent to 7.8 percent in September, the people at Fox News, Gov. Mitt
Romney, and Jack Welch were beside themselves with grief and anger. Jack
Welch felt justified to question the drop in the unemployment numbers from
8.3 percent to 7.8 percent as breakneck speed. And Gov. Mitt
Romney said, "7.8 percent unemployment is not what a real recovery looks like."
Remember that Labor Department was accused of fudging the numbers to favor the
re-election of President Obama. But routing for bad times, for slow growth and high
unemployment is political expediency. And blaming the terrorist attack on
Benghazi on the President, as Governor Mitt Romney, Senators John McCain,
Lindsey Graham, and Kelly Ayotte; and bubbleheads Rush Limbaugh and Sean
Hannity with the complicity of Fox News have done is difficult to explain.
Again, political expediency accounts for some of this. Of course, no one
questions these people's love of country. They are great Americans! You would
think they'd place the blame for the Benghazi attack squarely on the shoulders
of the terrorists.
It is not at all surprising that the
euro-area has slipped into another recession in just four years.
"The
euro-area economy
succumbed to a recession for the second time in four years as governments
imposed tougher budget cuts and leaders struggled to contain the debt crisis
that broke out in October 2009. Gross domestic product in
the 17-nation bloc slipped 0.1 percent in the third quarter after a 0.2 percent
decline in the previous three months, the European Union's statistics office in
Luxembourg said today. The result matched the median forecast in a Bloomberg News survey of
44 economists, as unexpected strength in Germany and France was outweighed by
contractions elsewhere." (see: Marcus
Bensasson) At this juncture, it appears monetary policy has been quite
impotent. Ben Bernanke's easy money policy has not been working. Its
continuation might set the stage for future inflation and high interest rates
that will crowd out investment. A more promising strategy is more stimulus
spending as President
Obama is ". . . asking Congress to approve at
least $50 billion US in long-term spending on the country's roads, railways and
runways in a re-election effort to show he's trying to stimulate the
sputtering economy." Republicans like to say we don't have a
revenue problem; we have a spending problem. They want draconian cuts in spending
to solve an artificial deficit crisis. Revenue is about 18.3 percent of GDP and
spending is 28.1 percent of GDP. These two trends are clearly out of whack. But
this should not be cause for alarm. Why? Because the U.S. economy is lucky to
have automatic stabilizers in place. In recessions, tax receipts decline
because of higher unemployment. Automatic stabilizers enable the Federal
Government receipts and expenditures that rise or fall automatically without
the intervention of the Congress or the President. In a recession, government,
business, and household face hard times. Not only do government receipts
suffer, but also business revenues and profits do no better--businesses cannot
sell their goods--so inventories rise, production falls below capacity, and layoffs
increase. Fortunately, the bottom does not come off the economy because the
automatic stabilizers kick in. That is, unemployment compensation to laid-off
workers grows, and corporate and individuate income taxes fall. Obviously, when
receipts fall off and spending does not fall off as much, deficits follow. In
this picture, firms have not incentives to borrow even when interest rates are
near zero, because they aren't willing to produce goods that they can move. And
they can't move their goods off the shelves because people are not working.
People are not working because firms aren't hiring. This is a vicious circle.
And to get out of it Keynesian economists look to the government (and deficit
spending), as the only real viable player remaining in a steep contraction of the
economy. Others argue cutting spending will signal to business the
government's commitment to live within its means, so business investments would
rise.
Below
is a snapshot reproduction of numbers for the United States government total
spending, deficit, revenues and GDP for fiscal year 2012. Just as an aside the
debt is the accumulation of past deficits. And the national (public) debt
stands at approximately $16 trillion. A gargantuan number, true, but remember
that most of it is owned (not by China and Japan) by Americans. Raising the
debt ceiling is a conversation for another time--although Republicans say they can use it for leverage.
Total
government spending = $3,795.6 (28.1%)
Federal
Deficit = $1,327.0 (9.8%)
Government
revenues = $2,468.6 (18.3)
GDP = $13,470.5
We are really looking at two options. The country has a budget imbalance for whatever reasons--two wars, Medicare Part D, the Bush tax cuts favoring the top marginal taxpayers--so receipts fall short of expenditures by 9.8 percent (18.3 percent receipts less 28.1 percent expenditure). These deficits add to the national debt, which is now about $16 trillion--debt ceiling question is yet another debate issue. The tension here is between taxing and spending and borrowing and spending. We have chosen to borrow and spend and this nine percent gap is a reflection on our predilection. However, the gap in the deficit has to be closed. On December 7, 2013 Sen. Harry Reid called Sen. Mitch McConnell's bluff for an up and down vote to let the President increase the debt limit. Sen. Reid said, okay, let's, forcing Sen. McConnell to filibuster his own bill--this was never before done in the Senate. If the stakes were not so high, this Kabuki dance would be funny--well, it was hilarious.
One
way to close the deficit is the way the euro-area policymakers are doing it--through
austerity. But we do that and run the very real risk of another recession just
as the U.S. economy is showing signs of stronger growth--consumer confidence is
higher, and the unemployment rate fell to 7.7 percent as reported by the Labor
Department on November 7, 2012. We could balance the budget on the backs of the
poor, the retired, the sick, the young, the old and women. And use the savings
from this to support cuts in top marginal tax rates for the rich--i.e. job
creators. John Boehner repeatedly states that increasing taxes on the rich
hurts the economy. Yet, there is empirical evidence to show that is not true. It
is true, however, that increasing taxes on the middle class might have adverse
effects on economic growth for obvious reasons. They spend increases in
after-tax income.
A
preferred solution is increasing spending--i.e. more stimulus--the $50 billion
President Obama is asking for the infrastructure--roads, bridges, etc. The idea
of course is to put money in the hands of people who would go out and spend it.
In addition, take some of the tax breaks the rich enjoy away--15 percent tax on
interest, dividends, and profits, (so-called unearned income), cut taxes on 98
percent of taxpayers, extend the payroll tax holiday, remove the cap of
$110,100 on FICA, don't meddle with Medicare, Medicaid benefits, and Obamacare
is the law of the land. The focus of the government should be both on creating
jobs and an environment for businesses to increase investment. And contrary to
Vice President Dick Cheney's assertion that deficits don't matter, in a bad
times they do. Deficits are needed to prevent the economy from totally imploding.
If you still entertain doubts about this, just look to the euro-area economy
for evidence.
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