government spending

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No Deal?

Well now.

As of 4:00 pm today the deal agreed upon by the White House and passed by the Senate – by a whopping 89-8 margin – has not been taken up by the House. Indeed, all the signs are that it won’t. Some of the leading conservatives in the House, Eric Cantor being the leader, have already announced that they oppose the deal because it doesn’t include cuts to social programs.

Thus it looks unlikely that the deal will be finalized.

Next steps?

One course is for the House to pass the deal but with significant additions, including those spending cuts. The bill would then go back to the Senate. There is no way such an amended bill would pass the Senate. The deal would then collapse.

There is little surprise in all this especially given the failure of the Republicans in the House to agree to anything in the round of negotiations just before Christmas.

The extreem right wing attack on social spending is the driver of this impasse and looks set to continue as the big roadblock.

The curious factor at play? Why did the Senate Republicans go along with the deal if they thought that their House colleagues would nix it? No one knows for sure at the moment.

Or is this a grand trick being played by the GOP?

Consider this:

The deal gets amended in the House to make huge cuts to social programs. It goes back to the Senate, where Democrats vote it down. Now the Bush tax increases go into effect and the Democrats are the ones who let that happen. The Republicans can pin the blame for the tax increases on the White House and the Democrats.

The deadlock and the farce continues …

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Last Minute Cliff Notes

In short:

  1. The US does not have a budget deficit problem. The current deficit is directly a result of the collapse of the economy. It is cyclical not structural.
  2. Thus we have a growth problem. Return our economy to growth and the budget gap substantially disappears.
  3. Further, our cycles are becoming more exaggerated because of the growth in inequality. The incomes of wealthy people tends to be more volatile. Thus the proportion of our total income subject to volatility is growing.
  4. Longer term we have a problem with our stupendously inefficient health care system. That affects both the government budget and private budgets alike. Attacking Medicare simply shifts the burden of that inefficiency into the private sector. It resolves nothing. Either way our economy suffers.
  5. As a consequence of our problem being cyclical any discussion that we cannot pay for the things we like – aka entitlements – is specious. Repeating such a thought is to repeat a harmful lie.
  6. This lie is being disseminated by the right wing of our politics not for budgetary reasons but for ideological reasons.
  7. Participating in budget deals in order to close our budget gap is to act as an agent of the right wing lie. It is to postulate the existence of something that does not exist. It is to be complicit in the attack on our social system.
  8. Current policy, based as it is on a false premiss, is a historic error.

That about covers it.

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Bad Dealing

Well the rumors are swirling with enough detail mixed in that the consensus is probably right: there is a deal in the works. A deal, that is, to prevent us going over the so-called ‘fiscal cliff’. Is this good or bad?

If you’re like me an subscribe to the view that we don’t have a deficit or a debt problem, then assessing any deal is a little surrealistic. You’re discussing a deal to a problem that doesn’t exist.

And, just for the record, the reason we don’t have a problem is that the vast majority of our annual deficit is due to the crisis. The economy dropped like stone taking with it Federal tax revenues. Then, as the recession grew in scale and scope, Federal spending ballooned as the safety net, such as it is, kicked in. These twin features of the budget, both entirely normal and entirely temporary, account for almost all the sudden surge in the annual deficit. The remaining lump was bequeathed us by George Bush and his ill advised tax cuts. The Bush factor is significant, but is manageable for a healthy growing economy. The problem is that since those tax cuts we haven’t had a healthy growing economy, we have been stuck  either in stagnation or in recession and tepid recovery.

Get the economy growing again and our deficit melts like the snow in spring, and the debt gets to be a smaller percentage of GDP even if it continues to grow slightly each year.

Having this realistic assessment in mind is essential when looking at any deal for the ‘fiscal cliff’, since it is an invented phenomenon and not a real feature of the economy. So the discussion is not at all one of resolving a fiscal crisis, but is a more ideological debate about the size and role of government.

For us on the left of center in politics the measuring stick of acceptability with respect to any deal is thus its defense of our expansive vision of that size and role. Plus, at a tactical level, does the deal contain anything that could not have been gained or lost had we simply gone over the cliff?

So. How does the deal measure up?

I give it a resounding ‘C’, bordering on ‘C-‘.

Why?

It gives up two pieces of treasure that I think could have been kept.

First, it allows the temporary payroll tax cut to elapse. This is especially annoying since our payroll taxes are not very progressive. Indeed since we do not collect tax on any incomes over about $110,000, any changes in its levels and rates tend to fall disproportionately on middle and working class incomes. So giving up the cut constitutes a tax increase for the majority of workers. I realize the cut was planned to be temporary, but keeping it another year to bolster demand would have been preferable. Looking on the bright side: since the elimination of the cut will boost revenues into the Social Security system, albeit on the backs of the least wealthy, it will help defeat any talk of imminent bankruptcy or failure of the system.

Second, and this one is more important, it looks as if Obama is about to cave in on changing the indexing for the annual increases in Social Security payments. It is well known that this will reduce those annual increases and thus, potentially, expose our elderly to more inflationary pressure. I realize that we have virtually no inflation at the moment due to the depressed nature of the economy, but we cannot expect that to be permanent. This shift in indexing is a definitive cut in benefits, which is a shocking thing for a Democrat to offer up. Presumably Obama sees it as a vital lure that wins him something that he could not get in any other way.

What would that be?

It cannot be the reported $50 billion in infrastructure spending. In a nation whose infrastructure is rapidly becoming the laughingstock of the western world, the amount is insultingly trivial.

Perhaps it’s the reported increase in revenues. This needs some explanation.

The revenue increase being rumored amounts to about $1.4 trillion. Most of this comes from a rate increase on incomes over $400,000. This, in itself is an Obama concession, since he had previously been holding out for an increase on incomes over $250,000. But by lifting the base of the tax rate increase, it looks as if Obama won two other additional revenue battles. The deal includes an increase in tax on capital gains – putting it back at its pre-Bush 20% – and the re-inclusion of dividends into ordinary income for tax purposes. Plus it seems as if the deal includes a cap of 28% on deductions like mortgage interest and property taxes. By setting that cap at 28% Obama avoids too much damage to the middle class and gets plenty of new revenue from the wealthy.

On balance these revenue increases are slightly more than what would have occurred had we simply gone over the cliff, but not so much more as to offset the damage done on the cuts side.

Another feature of the deal, a minor positive in fiscal terms, but huge in humanitarian terms, is that it extends unemployment assistance. Don’t forget that the Republicans have ben insisting that the emergency extension of those benefits be dropped.

Finally, there are promises from Obama to ante up a further $400 or so billion in more entitlement cuts, but that has to be thrashed out in Congress and so is highly uncertain, especially with the slight shift to the left in the Democratic caucus in the Senate. Besides most of it can come through an Obama favorite – allowing the Medicare system to negotiate for low prices. This would cut spending without harming benefits at all.

Oh, one last thing: the deal seems to include a two year moratorium on the fanatical Republican urge to destroy our national credit rating. They will forbear arguing over the debt ceiling. Oh boy. Never has threatening to be juvenile and irresponsible been taken more seriously in Congress.

That’s about it. That’s the deal.

Is it worth it?

I don’t think so. My point being that any concession during an artificial debate is unnecessary. Our deficit and debt issues, to the extent they exist at all, would have been better dealt with by expansionary policies. This entire discussion about cuts is a major victory for the right. What Obama appears to be doing is conceding the need for a fight over the size of government and then trying to limit the damage.

But his very election last month was premised on the notion that entitlement cuts were not necessary. In the argument about the 47% and his year long advocacy of tax increases on the wealthy Obama rallied support around the notion that the major economic issue we face is job generation and more equal wealth distribution. Two things that, in my opinion, go hand in hand. The country appeared, decisively, to reject the Republican agenda of entitlement cuts. Indeed, exit polls showed that voters didn’t care much about the deficit at all.

Yet here we are, a month or so later, and a newly empowered Obama is giving away entitlement cuts. I don’t think he should. Then again all the furor kicked up about the cliff has dampened confidence. Perhaps getting a deal, even a bad one like this, will be sufficient to get the economy going at a faster rate. Then, with growth higher and unemployment falling, Obama can turn to other parts of his agenda with more confidence.

And that slender hope is why I give a mildly passing grade to what, otherwise, is a both an unnecessary and bad deal.

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What Goes Around

Read any news story about the onrushing ‘fiscal cliff’ and somewhere within it will be a reference to the massive damage it is doing to business confidence. A major, if not the only, reason for limp business hiring and investment is the supposed uncertainty that the ‘cliff’ implies. Financial writers especially speak of the ‘cliff’ as if it were some huge dark cloud lurking in the distance about to engulf and swallow whole businesses and their profits.

Elsewhere we read that the impasse is ideological – it is caused by a titanic clash between two views of government. The big versus small argument that has torn American politics apart for the past four decades has reached its boiling point. The ‘cliff’ debate will determine, for now at least, which side wins. So there’s a lot to lose. No one wants to be the first to blink.

Other writers are now beginning to write about the inordinate shift in the way GDP is parceled out. It comes as a shock to them – quite why I don’t know since it’s a longer term trend – that profits are taking an ever larger chunk. Wages are being shunted to the side. The division of our collective efforts is ever more being scarfed up by the owners of assets. The contributors of labor are getting the shaft. This has apparently bamboozled some. After all, they see a historically low interest rate environment as one is which the returns to capital ought also be low. This point of view, I think, inherently assumes that the interest rate and profits are somehow determined by market magic. And if market magic – the supply and demand for investments – manifests itself in the form of low interest rates, then business ought to find it difficult to decouple profits from them. In this view market magic ought also determine profits.

Not so.

Interest rates and profits are more socially constructed. They are determined intentionally within the business community. The impact of market magic is tenuous. In the case of profits is is almost non-existent.

And this is where all these pieces of news start to fit together.

What goes around comes around.

About four decades ago big business started to throw its political weight about. It started to channel cash into right wing think tanks. It began to build up its lobbying capacity. It sought to roll back what it saw as the evils of regulatory government. To do this it, naturally, aligned itself with the Republican party which was also going through a thorough re-invention. The party of Lincoln was morphing into the party of Reagan. The two could not be more different.

Up until this change America had lived in the glow of a post-war social contract that de-emphasized big business, and especially finance, and sought to divvy out the economic rewards more evenly between labor and capital. Of course the tensions were abundant, but the balance was, by and large, honored by both major parties. There was a broad political consensus within which the differences were acute but not shattering.

Reagan changed all this.

He sought actively to destroy the post-war bargain. The energy that carried him forward was fed by the sudden shift in our political landscape. The deep south, once a Democratic stronghold, suddenly became the epicenter of modern Republicanism. This shift was entirely explained by racism and cyclical rise of evangelical religious fervor – one of America’s frequent ‘awakenings’. Though these two political forces appear different they can be united by a common theme: hatred of Washington and big government. After all it was Washington that imposed the hated Civil Rights Act, and it was Washington that undoing traditional conservative family values with its torrent of liberal actions aimed at equality of various sorts.

Big business saw its opportunity and allied itself with the Reagan coalition, becoming the third part of a grand coalition.

It was difficult to find policies that this cobbled-together coalition could all support, but opposition to big government and its intrusions into private life was the most potent. So that has been the banner under which the Republicans have fought every battle since. Tactically this has been expressed as opposition to anything that smacks, or even hints at, socially progressive activity. Hence the votes against the minimum wage, unemployment assistance, bank bail-outs, welfare of any kind, and so on. The sharp end of the attack was always the desire to lower taxes. For by reducing the flow of revenue into Washington the Republicans could starve big government even if they did not control sufficient power to kill it all together.

But while the attack on big government was the nice unifying theme, big business was not ideologically committed to its total destruction. It needs government. Business has a more complex relationship with Washington than the libertarians, the racists, or the socially conservative. It wants protection. It craves the arbitrary decisions that demonize foreign competition or carve out monopolies. It wants privileges of every kind to protect itself from the very market forces that it publicly swears to live by. The banks thrive off of subsidies even while they strut their market credentials. The big auto companies love to be bailed out even while they ship jobs abroad. Manufacturers want environmental and product protection regulations eased if not eliminated. But they want import quotas too. The relationship is tense and muddled. The best way, big business learned, to get its way was simply to buy politicians. Hence the recent flood of cash into elections. By debasing democracy business could tilt the balance of power in its favor and complete the political march it began back in the late 1970’s.

But.

What goes around comes around.

The result of the take over by business has begun to show up in the economy. By squeezing wages in order to shift wealth into profits in the pursuit of shareholder value big business has undermined itself. The imbalance is now so acute that demand is stifled for the very products that business wants to sell. Shareholder value is being undone by the very strategies designed to create it. Business can only maintain its profit growth rates by shifting itself abroad. Where labor costs are significant it moves production to the lowest cost location.

And it continues its relentless drive to replace labor with capital. Thus, when robots can do the work, business can suddenly start to bring production back onshore. It looks patriotic. It isn’t. It is simply looking to lower costs yet again. Once labor is an insignificant part of total cost then production decisions will be driven by other costs – like distribution. Whichever is the largest cost will always draw management attention first. But those other costs still represent a wage in some aspect. Distribution companies have come under pressure to reduce wages or workforces. The anti-labor drumbeat takes on a different tone, but remains the same.

So when the media and those analysts start to worry about the ideological divide that threatens debates about the ‘fiscal cliff’; or when they suddenly take notice of the imbalance between capital and labor in GDP; when they deride Obama for hanging tough on those tax increases for the wealthy; or when they chatter on about the uncertainty this all creates for big business; they are talking about the same thing.

The consequences, intended or otherwise, of the debasement of our democracy by big business.

The antagonistic tension between capitalism and democracy has never been more apparent. Democracy just flickered back to life: Obama’s winning coalition was founded on the less privileged majority banding together. That this base could rise up against that of the wealthy and big business has so shocked the media and the Republicans that they are having a hard time reacting. So committed are they to the ways of market magic and the notion that entitlement spending must be reduced to free up more GDP for allocation to the owners of assets – in the name of reducing deficits, naturally – that they choke on the daring of the little people to speak their minds. They are not used, after four straight decades of ever increasing power, to being questioned.

But the questioning has begun.

What goes around, comes around.

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Week Ending December 7th – Cliff Edition

This week we learned that nothing matters. Nothing. Not unless it’s about the Fiscal Cliff. Then it matters. Really, really matters.

Why?

Because serious people everywhere say so. And, as we all know or ought to know, serious people everywhere know what they’re talking about.

That the entire discussion is riven through with contradictions, errors, misconceptions, and lies, has no bearing. The Fiscal Cliff is all that matters. Unless we fix It the economy will plunge to its doom in a sea of red or black ink depending on which TV analyst you listen to.

Every aspect of other economic news is now interpreted through its impact on the Fiscal Cliff, or on how the Cliff affects it.

So the drop in consumer confidence is due to fears of the Cliff. The slowdown in hiring is because business fears the Cliff. Any hiccup on Wall Street is caused by market fears of … you know what. The entire universe is on deathwatch due to the great crisis about to engulf us.

Yes. The Cliff is a big deal.

Well not really. But that’s between you and me. Those of us who worry about the economy think the big issue remains how to jolt the economy from underutilization of resources back towards full utilization of those resources. We have an economy plugging along whilst leaving about 6% of its capacity idle. That’s a lot of wealth not being created. That’s a lot of lives going to waste. It’s an indecent and inhumane circumstance. It’s cruel. It is callous. But, since it doesn’t bear directly on the Cliff, no one cares.

The only reason we are talking at all about the Federal budget deficit and its impact on total government debt is because a few well financed right wing think tanks decided it was an issue. They created a campaign to get the attention of our nation’s elite, and succeeded beyond their wildest dreams. It was a brilliant marketing effort.

That the supposed crisis did not emerge from the state of our economy but from the imaginations of the think tanks is evidenced by the confusion that surrounds it.

Will going over the Cliff add or subtract from our debt? Both. It depends on the audience.

Will taxes go up? Or just tax revenues? What about tax rates? Will spending be cut? If so what? Does anyone have a plan to deal with the debt crisis anyway? A plan, that is, that doesn’t include anything that might hurt the elite. That seems to be important. Raising taxes on rich people or big business is a non starter. They generate jobs. It’s the  people who live off the job generators who ought to suffer. They add no value. Maybe they ought not be allowed to vote – that way they wouldn’t distort elections and the economy would be safe for job generators.

All of this has been discussed this week in one forum or another.

The muddle is such that no one now doubts the seriousness of the problem. Near panic is setting in. The situation calls for immediate action. And drastic action at that.

The Great Fiscal Cliff Caper, as I am sure historians will anoint it, is a shallow, venal, class motivated effort to prolong the hold of a few on the reins of our economy. There is no real basis for crisis. We do not have a debt problem and the majority of our deficit would fade away were we to address with any vigor the true problem: sluggish growth.

Greater growth would generate higher tax revenues. It would lower government spending by reducing crisis created transfer payments. And it would soak up our high level of underused resources. It would put in place a platform from which we could deal with whatever residual budgetary problems we imagine we have. Which apart from health care costs aren’t that many.

But, since our elite is largely unaffected by the lingering issues we have with slow growth, it is difficult for them to take it seriously. It is not, in their eyes, a serious issue at all. They immunized themselves during the crisis. They absolved themselves of blame. It wasn’t greed or shoddy banking. It wasn’t the accumulated effect of right wing economic policies. It wasn’t a market failure. It wasn’t a glitch in capitalism. It wasn’t deregulation. And it definitely wasn’t about inequality. No. It was about burgeoning government spending and reckless monetary policy.

They need to divert us from all this.

So they want to focus our energy on slaying mythical dragons. They whip up fear of hyperinflation caused by excessive money. Of – gasp – debt downgrades. Of excessive borrowing by poor people. Of – double gasp – the lack of affordability of entitlements. Yes. Those entitlements are the great satan. For if we are to afford to lug around all those dependent souls, that Romney 47%, we will have to tax the elite a little more. And that will cause such a ruckus at the polo club that we ought not do that. So let’s cut entitlements. The poor can afford it. The rich can’t.

But to do that we need to invent a crisis.

Let’s call it the Fiscal Cliff.

And the rest, as they say, is history.

It’s a lie, but if we all hold hands that lie can become a truth. No one must break ranks. The elite must discuss nothing else. Nothing else matters.

Not this week anyway.

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