Sunday, August 25. 2013
The Wichita Eagle published a piece by Dion Leffer on Sen. Jerry Moran's pep talk to the Wichita Independent Business Association. In it he admitted that he had thought about retiring, but then he realized that he hadn't done enough damage in Washington yet, so he feels obliged to keep banging at it.
I dashed off a letter to the editor, which was published Wednesday. (The link also gets you a letter by Amos Leitner on Israel's congenital inability to understand the concept and value of borders, a subject that is worth a post of its own.) Anyhow, here's my draft (I haven't checked it closely for edits):
Wichita Eagle letters are pretty rigidly limited to 200 words, so I tried to pack as many points as possible into that can. As such, I make a lot of assertions that seem pretty self-evident to me but which may not be so obvious to the reader. So I'd like to unpack this a bit here, and possibly bring up some more related points.
The first point everyone should understand is that the Federal deficit in no way resembles personal debts you or your household may have. There are several reasons for this, but the simplest is that the government doesn't grow old and unproductive, like individuals do. The government only needs to cover the interest on its debt, whereas creditors insist that we, because we age and become less productive, also pay down the principal. The amount it takes to service interest on the debt is very small compared to the total debt, especially when the economy is depressed -- something which leads to especially low interest rates.
The same thing could be said about corporations, and indeed much of the time they only pay interest, paying off debts as they mature by issuing new debt -- but they occasionally go bankrupt when their prospects sink and their creditors balk. Same thing can happen with state and local governments, although it is much rarer, if only because they can always, in principle at least, raise whatever income they need through taxes. The US government can raise taxes too -- and can do so much more efficiently than state and local governments can -- but they also have a couple more important tricks up their sleeve. For one thing, the federal debt is owed in dollars, which the federal government can simply print as needed. For another, the Federal Reserve effectively controls the interest rate the government has to pay on its debt, so it can intentionally reduce the cost of servicing that debt. (Actually, these two points are joined together.)
This isn't to say that the federal debt never matters. There are circumstances when increasing the federal debt, at least as in ratio to GDP, can cause inflation and/or cause a drag on the economy by pushing up the cost of finance for the private sector. But those times aren't now, and I have reason to doubt that the second factor will ever be true again.
As for inflation, one can even argue that would be a good thing. Inflation is tough on people on fixed incomes, such as pensions, but that can be mitigated as Social Security does with cost-of-living escalators -- something, by the way, Greenspan successfully attacked in the 1990s, and which Obama has foolishly offered to sacrifice as part of his "grand bargain" scheme. But if you assume that everyone has equal wage-price flexibility, inflation reduces to a simple trade between creditors and debtors. Inflation lets debtors pay off their creditors with cheaper dollars, so you can see why bankers hate hate hate inflation. But we're in a recession now because businesses and consumers aren't spending, and the main reason they're not spending is debt overhang. The economy is only slowly picking up as those debts are paid off (or written off), and the faster that happens the better. Inflation, assuming it can be done fairly, is one way to make that happen.
Of course, that's a big assumption, because nearly everything in the current economy is structured to be unfair, and nowhere more so than in matters of finance. The current recession is the direct result of a vast and unscrupulous expansion of consumer and business credit and its inevitable collapse -- a path that was paved by lobbyists and politicians as they systematically ended regulations that limited usury, combinations and conflicts of interest, even outright fraud, while allowing bankers to pocket obscene profits and even protecting "too big to fail" bank owners against their own misjudgments.
If not for the latter, the big banks that caused this crisis would have gone bankrupt and been reorganized -- this is in fact what happened during the S&L crisis in the late 1980s, early proof how deregulation of banking leads to catastrophe -- and a lot of their loans would have been written down or off. Such a writedown would have been a quicker and more efficient way to get out from under the debt overhang that had dragged the economy down. Several such plans were floated, but nothing was accomplished, mostly because writedowns would have looked bad on the banks' books, but also because the Tea Party blew a gasket over the idea that the government might help reprobates who had gone over their heads in debt.
The Tea Party instinct here almost instantly became the Republican Party consensus: they decided that they would rather have a deep and long recession than to allow the government to intervene and do some good for the vast majority of people who weren't bankers, who didn't cause the financial collapse, who didn't benefit from the extraordinary largesse handed out by the Fed and the Treasury to save a banking system that had completely failed. To be fair, the Tea Partiers by and large didn't support the bank bailouts either -- their eagerness to punish the whole world for its sins seems boundless -- but the banking system found grifters enough in both parties to secure their salvation.
While reducing the debt overhang either by inflation or writedowns would help get the economy going again, there was a simpler approach, one that had been proven in the past, and which could work much faster given the political will. This was to increase government spending to make up for the private sector shortfall. To some extent this happened, and that is the main reason the recession didn't go any deeper than it did. The government's first line of defense against recessions is a set of "automatic stabilizers" that kick in, well, automatically, to soften any economic downturn: unemployment insurance, various welfare programs like food stamps. These would have worked better had we had more of them, but decades of conservative efforts to weaken the safety net and drive down the costs of labor have ravaged those programs. The second thing that happened was that Obama, over unified Republican opposition, pushed an emergency stimulus bill through Congress. This turned out to cover only about half of the expected shortfall, and much of the total was in the form of relatively inefficient tax cuts, and spending cuts at the state and local level undid much of the gain, but had the Republicans prevailed the recession would have gone deeper. As it is, they had to settle for longer.
The economic collapse led immediately to a huge drop in tax revenues, at the same time automatic stabilizers, the bank bailouts, and stimulus spending added to government expense, so the deficit -- already high due to the combination of the Bush tax cuts and the Bush wars -- skyrocketed. That gave the Republicans their great mystical story line: they paint the deficit as the great peril facing the nation today and as far into the future as it takes until they win back the presidency and the next Dick Cheney admits that "deficits don't matter" anymore. Moreover, they argue that the only way deficits can be brought under control is by cutting spending, especially on things that actually help people, even though doing so slows the economy down, reduces tax revenue, and leads to a death spiral of further spending cuts.
In the past, the problem with countercycical spending has usually been one of political will. Because it is needed during recessions, it creates large deficits which bring out the scolds in droves. Even in the 1930s when the need was clearest, Franklin Roosevelt was dogged both as much by his own deeply held belief in balanced budgets as by opponents (whom he could hold in fabulous contempt, a knack that Obama and Clinton evidently lack). Only with the bipartisan commitment to WWII was he able to throw caution to the winds and use government spending to push the economy all the way to full employment: this resulted in the longest, broadest economic growth in the nation's history, even as postwar government spending returned to "normal" levels. Of course, we don't need anything remotely close to WWII spending now, but the example gives you a sense of the advantages a full-employment economy offers, like major investments in public infrastructure and education.
Full employment means that everyone who wants a job can find one, and it means more: it means that many people can find better jobs than they have now, and that most people can see their pay reflect better the value they produce (as opposed to now, when the weakness of the labor market -- the legitimate fear you have of losing your job -- takes a chunk out of your pay). Under full employment, people are worth more, their time is worth more, and they (and the public) invest more in education, so you wind up with a more productive and efficient workforce, and ultimately a much richer country.
Full employment is supposed to be the Fed's policy directive, but it's taken a back seat to fighting inflation ever since Paul Volcker became chairman in 1979. Although inflation is supposed to be based on consumer prices -- which are strongly influenced by patents and monopoly rents, and in the 1970s were largely driven by oil shocks caused by cartels -- economists came up with a theory called NAIRU to blame inflation on labor and, especially, on full employment. Under Reagan, and aided by the 12% unemployment Volcker created by raising interest rates to unprecedented levels, businesses cranked up their war on unions and further squeezed unprotected workers, and through their political cronies worked to weaken the safety net, making workers all the more fearful of losing their jobs.
A weak labor market has the opposite effect of full employment: most workers have fewer prospects of improving their lot; many find themselves unable to find jobs at their skill level, so have to settle for relatively unproductive and unrewarding jobs. Education is less likely to pay off -- even as public education resources are being reduced, so costs are shifted to individuals, often resulting in unprecedented levels of debt -- so workers get less of it, or train more narrowly for skill niches, or fall back on desperate measures like joining the military. (Thanks to the Bush wars, the latter is as likely to train you to be psychotic as to hold down a quality job.)
Moran is right to worry that his "kids" will face -- indeed, already do face -- a world with less opportunity than the one he grew up in. And that's even more true for the vast majority of Americans who didn't grow up with the advantages that Moran started with, let alone his eagerness to serve as a "useful idiot" for those who have sponsored his political career -- a list that (no big surprise here) started with the Koch brothers. But the reason for worrying isn't the federal deficit phantom -- a problem that could easily be handled by sensible politicians, and that in any case is far removed from the present. The real reason is how the political ascent of the right since the 1970s has crippled economic opportunities for the vast majority of Americans while at the same time allowing a tiny privileged elite to live ever more rarefied lives.
Depending on how you slice it, that "tiny privileged elite" may be 1% of the population, or even smaller. Since the current recession officially ended in mid-2009 -- the point where overall GDP stopped shrinking and started growing -- virtually all of the growth in the economy has gone to the top 1%, but that merely continues a trend that started in the early 1980s. The numbers that document growing inequality trends are well known but surprisingly sterile. (There are several good books on this, like Timothy Noah: The Great Divergence: America's Inequality Crisis and What We Can Do About It and Joseph E. Stiglitz: The Price of Inequality: How Today's Divided Society Endangers Our Future run through the relevant numbers.) One thing that still needs to be done is to go through the broad range of everyday life experiences and show how inequality distorts life at all ends of the scale.
Perhaps the most obvious case is higher education. Following WWII college became accessible and affordable for most men, thanks to the GI Bill, and over the next few decades heavy public spending plus scholarships plus a relatively minor loan program made it seem possible that anyone who could hack the grades could get a college education and wind up with a rewarding and relatively lucrative career. None of my ancestors had made it through college, and I didn't either, but I (foolishly, no doubt) fell just a couple credits short of a BA from a prestigious private university. I wound up owing $2,000 in loans, and despite the lack of a degree I had little trouble getting good jobs and making a much better than average living. Since then, the anti-government parties -- taking as gospel a Ronald Reagan joke -- have cut way back on public support for higher education, while the schools themselves colluded to raise prices way above the inflation rate (the Ivy League school were sued by the Clinton administration for fixing prices, but antitrust enforcement was halted under Bush and has yet to be reinstated under Obama), and the banking industry got ever more into the act. So, for instance, I have a niece who got her law degree with close to $100,000 in debt, but has struggled to find an appropriate job.
School debt has become such a huge obstacle that young people -- probably even Moran's "kids" -- are caught in a bind: on the one hand if they don't pay up they'll never get a chance at jobs that will allow them to, if not become rich at least live comfortably, although frankly the odds of that level of success are increasingly slim; on the other hand, if they don't pay and avoid that debt they will probably be stuck in bottom end jobs with no security and no benefits. It's hard for people to judge these intergenerational shifts: most people start out with low pay jobs, then over time build up their expertise and seniority until they reach a peak, hopefully close to retirement, so when older people look at the problems young people run into, they tend to recall themselves and figure nothing much has changed. But much has changed: more and more middle-aged people are finding their careers chopped down well before they expected to retire, and few of them ever regain their footing. And more and more young people never really get on track, especially if they lack parents who can help out well past college. (Even for my generation that made a difference.)
There are many more aspects to this. Back in 2009, when Obama wanted to roll back the Bush tax cuts on incomes over $250,000, I recall someone in Chicago publishing a household budget which purported to show that his family was only barely getting by on its $250,000/year income as it was, without having to cover more taxes. The budget was unintentionally revelatory: aside from having spent a bit more than average on cars and a house, all of the listed household expenses were for privatized versions of things that were provided to everyone in modern European social democracies: they were paying off school loans, paying for health insurance, sending their children to private schools, saving for their children's college, and socking away quite a bit of money for future retirement. Otherwise, they were living the lifestyle of someone who makes less than half their income in Europe (and has a smaller house, but probably a better car).
My point here isn't just that a bit of socialism is the best thing possible for the middle class. (Again, let me recommend a book, Thomas Geoghegan: Were You Born on the Wrong Continent? How the European Model Can Help You Get a Life.) The finer point is that all those extra expenses are a desperate attempt to bridge the chasm that's opened up between rich and poor and all but swallowed the middle class. And more importantly, that chasm didn't just open up on its own: it's been hollowed out by the right's war on any possibility of the government aiding the welfare of the majority of the population. Aspiring parents need private schools because the public ones are rotting out, from underfunding and all sorts of disinterest and stupidity. They have to pay much more for school and health insurance because we've turned those services into arenas for profiteering. And you have to save so much more money while you can work because you know that in the future your country will no longer have the will let alone the ability to take care of you. So not only does Jerry Moran's future offer less opportunity for the "kids," it offers less security for Moran and his cohort -- probably why he's decided to keep sucking up to the Kochs so he can milk out another term in the Senate.
Some other quick points:
Obviously, much more could be written about all of this. Stiglitz, for instance, is very good on rents.
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