There are a number of issues in this country’s current political scene where the disconnect between logic and action makes my brain contemplate implosion. To wit:
Privatizing Social Security. To those calling for this—mostly Republicans and mostly (though not entirely) from the Tea Party wing of the party—one wants to holler through the world’s largest bullhorn, “Where the hell were you from 2007-2009? Visiting another planet?” Did you miss the fact that the investment market tanked during those years and flushed literally trillions of 401(k) dollars down the toilet? Assuming you ever took Econ 101 (or simply have a modicum of common sense), did you miss the part about investment entailing risk? First Congress enabled, indeed encouraged, businesses to discard defined benefit retirement systems and push their employees into personal risk investment plans; now the GOP wants to yank the last remaining safety net for older Americans, Social Security, and replace it with the same kind of private investment accounts that wiped out so many people over the past two years.
The excuse drummed up by conservatives to support this counter-intuitive idea?
Why, the ballooning national debt of course. Only one problem here. Social Security has since its inception paid for itself, and will continue to do so until at least 2037. It adds not one dollar to the budget deficit or the national debt. At this moment, more money is coming into the Social Security Trust Fund every year than is going out. As we draw closer to 2037, some changes in the system will be needed to make sure that continues, but none of those is so drastic as to justify the scuttling of the entire program. For a start, simply extend the FICA (payroll) tax to all earnings instead of cutting it off at $97,000.
Cut Off Unemployment Benefits AND Extend Tax Cuts For The Rich. While this one is a Republican mantra, it is a theme now being espoused by some conservative Democrats as well. For me, this poses both a logical and an ethical conundrum. The logical problem is obvious. It’s hard to estimate how much extending unemployment will cost because it’s hard to predict how long it will be needed, but most economists put the probable price tag at somewhere around one billion dollars. That sounds like a lot, but it’s actually adding about 1% to the budget deficit. Extending tax cuts for the rich, on the other hand, will deny the U.S. Treasury something in the order of seven hundred billion dollars in just the next decade. So if the urgent thing is to get the budget deficit down, which should be more worrisome—adding one billion dollars to the deficit, or refusing to reduce it by seven hundred billion? I was never super-acute in math, but that seems like a no-brainer.
The ethical problem is equally obvious. It’s been estimated that allowing the tax rate on the rich to go up 3% will add, on average, about $9,000 to their tax liability. Taking away the $270/week an unemployed citizen is currently receiving deprives him of his ability even to buy food. I’m not sure how the Jim DeMint’s of the world go to sleep at night faced with that dichotomy.
This position makes no sense even when looked at from an economic policy point of view. That $270/week the unemployed receive is going right back into the economy for the goods and services its recipient needs to live. It is adding, in other words, to the consumer spending everyone agrees is the key to full economic recovery. The $9,000 in additional taxes the rich aren’t paying is, for the most part, going into investment accounts that produce nothing, purchase nothing, indeed, do nothing in terms of spurring economic recovery.
Cut Federal Spending In A Recession. Little history lesson is appropriate here.
In this country, the stock market bombed in 1929. FDR was elected in 1932 and he immediately did things like declare a bank “holiday,” but more importantly, he initiated a whole raft of government funded programs like the CCC and the WPA to put Americans back to work and put money into the economy. Added side benefit—a lot of improvements were made to infrastructure. When he was re-elected in 1936, the economy was beginning to recover and Roosevelt, stupidly as it turned out, lent an ear to political advisors who cautioned him to drastically slash the level of federal spending. The result was that the economy dove deeper into recession than it had originally been, and would in all likelihood have remained there were it not for a world war.
In the late 1980’s and early 1990’s Japan, which had been a world economic leader for two decades, experienced a bubble-burst not unlike the one we recently experienced. The Japanese government’s immediate reaction was to cut back on spending at every conceivable corner. Three years or so later, it realized the fecklessness of that approach and began spending, but at levels far too low to move the economic needle. The result was what is usually described as Japan’s “lost decade,” a ten year period that vacillated between deflation and stagflation, but showed no growth.
Economics is often referred to as the “dismal science,” and, to be sure, it is perhaps the least empirical of even the social sciences. Nevertheless, when virtually every economist not employed by the Heritage Foundation or the American Enterprise Institute states unequivocally that what is needed now is the aggressive federal spending that characterized FDR’s first response to the Great Depression, one has to wonder—why is no one in Washington, including our supposedly professorial President, listening?
How much gray matter does it take, really, to understand that when you remove money from an already struggling economy, fewer people have jobs, meaning fewer people have money to buy things, meaning demand for things goes down, meaning more and more businesses either fail entirely or cut back on production, meaning even fewer people have jobs . . . surely the point is obvious.
I’m not suggesting the budget deficit and the national debt aren’t problems. But a cure that is entirely focused on cutting spending has historically been shown to be worse than the disease.
A little thought please that doesn’t revolve around ideology, what’s best for the party, or what’s most likely to get me re-elected.
It's interesting that most, if not all of America's major downturns are preceeded by the availability of easy credit, which brings to mind something Greenspan said about "over-exuberance". (blame this diaster on who you will) Unfortunately, I haven't had the time (or desire) to catch up on my Keynes, Smith, or Friedman and this arguement must return to ideology as your keynesian view, if you'll agree to call it that, though pragmatic in the short term, is the only philosophy you present. As a Naturalized American, I have difficulty buying into government intervention and the so-called mixed economy. I see it as a breeding ground for corruption, as do most cynics. Look at Social Security, look at AmTrac. Is it not alarming that the average government salary/benefit package is larger than that of the average private sector position? Furthermore, while I advocate the use of tax dollars for infrastructure as needed, it seems to me these "shovel ready" projects are mostly temporary, artificially infusing finite demand into the marketplace while increasing the debt. Could this be the reason Roosevelt's advisors cautioned him? Well, I'm no historian. I do remember, a few years ago, we had a Superbowl here in Jacksonville and numerous businesses, everything you can imagine, began popping up in anticipation of our city finally showing up on the map. Of course, when the dust cleared, I'm sure you know where this is going.
ReplyDeleteOh look, I'm rambling. Sorry, I'll try to address the issues next time.
By the way, thanks for doing the blog and for the accolades. Any meaningful contribution I make is the result of my excellent education at Ole Miss!
shawn--i love your comments. couple of thoughts in response. greenspan's warning about "over-exuberance" came pretty late in the game and after he--following the friedman model--had encouraged low mortgage interest rates, low taxes on the wealthy and corporations, and as little regulation of the investment sector as possible. it was good that he finally recognized that things were a little out of control, but i suspect most thoughtful analysts would agree, his policies were a big part of why they were.
ReplyDeleteAmTrac i will agree with you is a disaster, something the govt. never should have gotten involved with. social security, i'm not sure what you're saying. no question there have been frauds perpetrated on social security disability claims etc, but by and large it has been a program that has done what it said it would do--provide seniors with a financial safety net.
and the government salary/benefit package question? federal and state retirement packages do tend to be more liberal than private sector pension plans now that most of those have been directed into 401(k) type accounts. but keep two things in mind here: 1) government salaries lag behind private sector salaries for comparable jobs by about 20%; government pension plans--at least on the state level--aren't solely subsidized by the government. they are plans paid into by the employee, whose contributions are matched by the government--in other words, what all pension plans use to be. that those plans result in better, and more secure, retirement incomes for employees is a function of how well the government entity invests the employee contributions.
finally, you're absolutely right that "shovel ready" projects introduce finite demand for labor and jobs into the market. when the project is completed, those jobs will be gone. the thing to remember is that those jobs would never have existed in the first place if not for the project, and while the jobs provided don't last a lifetime, they last long enough to get a family through a year or maybe two. is that a bad thing?