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Casting Light on "The Moment of Truth"

By       Message James K Galbraith     Permalink
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When our family takes a moment from its own budget plans to examine this one, they may feel less than completely grateful. Perhaps they'll notice that the sacrifices so nobly embraced by "their leaders" will actually fall on them. Social Security, Medicare and Medicaid will be cut. The Earned Income Tax credit might go away. The mortgage interest deduction will be curtailed -- depressing home prices even if our family's modest mortgage remains deductible. Federal workers -- ten percent of them -- would be singled out and fired. Military pensions will be reduced, we learn, to bring them "in line with standard practices in the private sector." Practices in the private sector often do not include pensions; the commission does not say why, if that is so, future young men and women would volunteer.

Noticeably missing from the Commission's plan are measures that would fall on the "leaders" themselves. The very richest pay cash for their houses. The commission would reduce, not increase, marginal income tax rates. There is no suggestion of a financial transactions tax. It's true that the Commission would tax capital gains and dividends as ordinary income, but at the top rates they propose, who would care?

In the fourth paragraph, the Commissioners declare that:

"We spent the past eight months studying the same cold, hard facts. Together, we have reached these unavoidable conclusions. The problem is real. The solution will be painful. There is no easy way out. And Washington must lead."

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The reference to "studying" is suggestive. Are there any studies? White papers? Background analyses? Normally, one might expect a commission to produce some. In this case, it did not. The Commission's website makes no mention of any such thing.

Paragraph five makes two uses of the word "grandchildren," but otherwise says nothing.

In paragraph six, the Commission summarizes the evidence for its dire conclusions:

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"Over the course of our deliberations, the urgency of our mission has become all the more apparent. The contagion of debt that began in Greece and continues to sweep through Europe shows us clearly that no economy will be immune. If the US does not put its house in order, the reckoning will be sure and the devastation severe."

This is as close to an evidence-based statement as the preamble gets. So what is the evidence? Does the European crisis really show "clearly that no economy will be immune"?

Well, in fact Germany, France, Holland, Britain and even (so far) Belgium are quite immune, despite debt-to-GDP ratios comparable to or higher than ours. Even Italy isn't in crisis (at least, not yet). Ireland is deep in crisis, despite budget surpluses before the crisis and three years of austerity even harsher than proposed here. Spain is in crisis, despite a public debt burden much lower than our own.

What seems clear, on any reasonable reading, is that big countries don't get hit by speculators the way small countries do.

The Commission also seems unaware that the world crisis didn't begin in Greece. It began in America. It spread to Greece when US private debt markets collapsed and investors sought safety by dumping small-country bonds. And where did the investors flee? Why, directly into United States Treasury bonds! Quite the opposite of being vulnerable to crisis, the US Treasury is the largest, most obvious, most notorious and greatest beneficiary.

The only other effort at economic analysis in the report is the section entitled "The Looming Fiscal Crisis." This begins with the claim that, "Our nation is on an unsustainable fiscal path." No evidence is presented. The current deficit is big, of course, because unemployment is high, but there is no program here to fight unemployment.

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The rest of the section argues that something terrible will happen if the debt-to-GDP ratio rises, as projected, to 90 percent in 2020 -- and then continues on to 185 percent of GDP by 2035. Yes, this would be terrible: it would mean that the private economy never recovered. But the commission assumes that the private economy does recover. In testimony to the Commission on June 30, I described the incoherent nature of the projections that produce these scary debt-to-GDP numbers. The Report makes no effort to rebut my work. Indeed, the fact that I submitted testimony, at their invitation, on behalf of Americans for Democratic Action, goes unmentioned on their witness list.

The final three paragraphs of this section trot out the bugbears. There is the fact that much US Treasury debt is held by (gasp) China, "a nation that may not share our country's aspirations and strategic interests." As if China's US debt holdings were not determined by China's trade surplus, but by our debt level.

And then the Commission reverts to the great bogeyman of 1993, President Clinton's first year: The bond market. "If we do not act soon to reassure the markets," they write, "the risk of crisis will increase"" Oh really? You can look up the interest rates in the paper, any day.

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Galbraith is the author of six books and several hundred scholarly and policy articles. His most recent book, "Unbearable Cost: Bush, Greenspan and the Economics of Empire, was published by Palgrave-MacMillan in late 2006. His next book will be "The (more...)

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