With the election behind us, President Obama and the lame-duck Congress return to Washington to face a fiscal showdown, occasioned by automatic tax hikes and spending cuts scheduled to kick in after the first of the year. Most economists, including the nonpartisan Congressional Budget Office, agree that if nothing is done, this arbitrary, Washington-created “fiscal cliff,” as Federal Reserve chair Ben Bernanke dubbed it, will likely drive the economy back into recession.
It is probably already contributing to slower growth. The New York Times reports that manufacturers are delaying capital improvements and postponing hiring for fear that no deal will be made. More than a third of the nation’s school districts have reduced programs and hiring in anticipation. If there’s no deal, domestic agencies face an 8 percent cut across the board in fiscal year 2013. Middle-class families will see an income tax hike of about $1,500, a cut in child tax credits by about $500 per kid, a cut in tuition tax credits by $700 a year, and a hike in the payroll tax of $1,000 a year. Lower-income families will suffer cuts in the earned-income tax credit. The result is renewed discussion of a “grand bargain” to avoid that self-destructive course.
But the “cliff,” with its misleading metaphor of an imminent, irreversible fall, has been misconstrued by the media. These changes are not irrevocable; it’s not as if they can’t be fixed after January 1 (more on this later). But in true shock doctrine fashion, the ersatz crisis is being used to demand changes that would otherwise be politically impossible: cuts in Social Security, Medicare and Medicaid, along with deep cuts in basic government services, combined with tax increases. Wall Street billionaire Pete Peterson has enlisted bankers and CEOs in a multimillion-dollar campaign spearheaded by the hysterical Cassandras of debt, Alan Simpson and Erskine Bowles, former co-chairs of President Obama’s deficit commission, to demand action now. Editorial opinion and much of the punditry, along with a claque of supposedly bipartisan or nonpartisan lobbying groups, have dutifully echoed the call. Gaggles of senatorial aides have been meeting to explore what a deal might look like.
In an initially off-the-record campaign interview in late October with The Des Moines Register, Obama indicated that he intended to offer Republicans a deal similar to the one he offered House Speaker John Boehner in the summer of 2011: meeting the Simpson-Bowles target of $4 trillion in deficit reductions over ten years, with a ratio of $2.50 in spending cuts for every $1 in new revenue as well as “working to reduce the costs of our health care programs.” Since the election, Boehner and Senate Republicans have indicated they would support an agreement that reduces deficits by cutting Medicare and Social Security in exchange for tax reform that lowers rates but raises more revenue through closing loopholes.
Virtually every aspect of this hysteria is wrong. The United States does not have a short-term deficit problem, and the fundamental long-term problem isn’t one of soaring debt; rather, it is the lack of a foundation for sustainable growth that includes working people. Without a political movement to achieve the latter, very little progress will be made on the former.
The grand bargain being discussed in Washington reflects an elite consensus far removed from what voters want. Americans want action on jobs, and most support the president’s call to raise taxes on the rich. Overwhelmingly, they want basic family security programs protected. Any deal that cuts Medicare and Social Security, slows growth and increases unemployment will look a lot more like a grand betrayal than a grand bargain. And virtually the entire organized base of the Democratic Party, from unions to civil rights and women’s groups, is mobilizing in opposition.
There are still more than 20 million people in need of full-time work. Mass unemployment guarantees stagnant or falling wages and sputtering growth. Long-term unemployment—40 percent of those out of work have been jobless for more than twenty-seven weeks—erodes skills, confidence and lives. The Federal Reserve, understanding the danger, has used monetary policy to keep interest rates low and pump money into the economy. Yet Americans are still strapped, given declining real wages, the collapse of the value of their homes and the rising cost of necessities, from gas to college education to healthcare. Companies are sitting on trillions in profits, waiting for demand to pick up for their products. The Fed can’t generate the growth we need through monetary policy alone. In this situation, the federal government should be acting to boost the economy.
Washington’s obsession with deficits is illogical for two reasons: first, there is no sign of accelerating inflation; interest rates are near record lows, as global investors seek shelter in US securities from economic turmoil abroad. We will never have a better opportunity to rebuild our decrepit infrastructure, so there’s no reason for Washington to focus on belt tightening now.
Second, austerity is, paradoxically, likely to undermine the stated goal of deficit reduction. Cutting spending and raising taxes in a weak economy destroys jobs and slows growth. The increased unemployment leads to declining tax revenue as well as increased demands on government services, all of which adds to the deficit. This is the famous “debt trap” recently experienced in much of Europe, where premature and harsh austerity drove many EU countries into recession. Spain, Portugal and Greece have piled up worse debt burdens as their economies collapsed. (more…)