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How Occupy Stopped the Supercommittee

By       Message Dean Baker       (Page 1 of 1 pages)     Permalink

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Congress gave us a wonderful Thanksgiving present when we got word that the supercommittee "superheroes" were hanging up their capes. While many in the media were pushing the story of a dysfunctional Congress that could not get anything done, the exact opposite was true. The supercommittee was about finding a backdoor way to cut social security and Medicare, and create enough cover that Congress could get away with it.

It is important to remember the basic facts about the budget and the economy. Contrary to the conventional wisdom in Washington, it is easy to show (by looking at the website of the Congressional Budget Office) that we do not have a chronic deficit problem. In 2007, prior to the collapse of the housing bubble and the resulting economic downturn, the deficit was just 1.2% of GDP.

The deficit was projected to remain near this level for the immediate future, even if the Bush tax cuts did not expire, as originally scheduled in 2011. If the tax cuts were allowed to expire, then the budget was projected to turn to surplus.

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All this changed when the collapse of the housing bubble wrecked the economy. The story is simple, the housing bubble generated over $1tn in annual demand by stimulating record levels of construction and causing a home equity-driven consumption boom. This demand disappeared when the bubble burst. This is what created the large deficits that we are now seeing.

The $1tn-plus deficits are replacing lost private-sector demand. Those who want lower deficits now also want higher unemployment. They may not know this, but that is the reality -- since employers are not going to hire people because the government has cut its spending or fired government employees. The world does not work that way.

While this is the reality, the supercommittee was about turning reality on its head. Instead of the problem being a Congress that is too corrupt and/or incompetent to rein in the sort of Wall Street excesses that wrecked the economy, we were told that the problem was a Congress that could not deal with the budget deficit.

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To address this invented problem, the supercommittee created an end-run around the normal congressional process. This was a long-held dream of the people financed by investment banker Peter Peterson. Their strategy was derived from the conclusion that it would not be possible to make major cuts to social security and Medicare through the normal congressional process because these programs are too popular.

Both programs enjoy enormous support across the political spectrum. Even large majorities of self-identified conservatives and Republicans are opposed to cuts in social security and Medicare. For this reason, they have wanted to set up a special process that could insulate members of Congress from political pressure. The hope was that both parties would sign on to cuts in these programs, so that voters would have nowhere to go.

However, this effort went down in flames this week. Much of the credit goes to the Occupy Wall Street (OWS) movement: OWS and the response it has drawn from around the country has hugely altered the political debate. It has put inequality and the incredible upward redistribution of income over the last three decades at the center of the national debate. In this context, it became impossible for Congress to back a package that had cuts to social security and Medicare at its center, while actually lowering taxes for the richest 1%, as the Republican members of the supercommittee were demanding.

Now that the supercommittee is dead, Congress must be forced to address the real crisis facing the country: the 26 million people who are unemployed, underemployed, or out of the labor force altogether. This would not be difficult if we had a functional Congress.

The teenage unemployment rate is 25%; the unemployment rate for African American teenagers is 45%. A youth employment program simply putting people to work cleaning up parks and abandoned buildings could put many of these people to work. If we got adequate funding to state and local governments, they would not be paying off 30,000 workers a month.

We have a serious need for rebuilding our infrastructure. Major projects take time -- but unfortunately, time we have: no projections show the economy recovering until at least 2016 or 2017. In these circumstances, we can promote work-sharing, which would encourage employers to keep workers on the job instead of putting them on the unemployment rolls.

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These are the sorts of things that Congress should be debating right now. As the financial markets keep telling us, the budget deficit is not a problem -- otherwise, the interest rate on 10-year Treasury bonds would not be 2%.

There is a long-term issue with the deficit, but as every budget analyst knows, this is a health-care story. If the United States fixes its health-care system, then the deficit will not be a major problem. If we don't, then our broken health-care system will wreck the economy regardless of what we do with Medicare, Medicaid and other public sector health-care programs.

So, everyone should enjoy their Thanksgiving, grateful that the supercommittee turkey is dead. If the 99% can keep up the pressure, Congress will return to reality after the holiday.

Cross-posted from The Guardian


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Dr. Dean Baker is a macroeconomist and Co-Director of the Center for Economic and Policy Research in Washington, D.C. He previously worked as a senior economist at the Economic Policy Institute and an assistant professor at Bucknell University. (more...)

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