Wednesday, August 25, 2010

Beyond Budgetary Fundamentalism

John Buell
Author of Evil Doers: Demonization and the End of Civil Debate in American Politics (NYU Press)

“Run away government spending” is an easy target now. Nonethless, It is not the cause of our problems. Government spending will not “crowd out” currently nonexistent private investors. It is essential in stimulating the demand on which the private sector and even our ability to sustain healthy debt to GNP ratios depend. Further cuts in domestic job creation, sure to result from Congress’s unwillingness to add new stimulus and its slow and miserly extension of unemployment benefits, will even be counterproductive. It will lead to more unemployment, more benefit spending or prisons, emergency healthcare, domestic violence, and further declines in government revenues―a true death spiral.
That message, however, hardly ever gets a hearing. CNBC anchors regularly proclaim: “only the private sector creates wealth.” I wonder what these anchors would be using for their research and communication but for massive government subsidy and R&D on computers and the internet.

Critics also claim that the Obama stimulus did not work. Using carefully sourced data the nonpartisan CBO shows that the stimulus package created jobs and saved others that would be lost. The problem here is political. As even some business economists pointed out at the time, the initial Obama package was far too small. Dean Baker points out the Federal package amounted to less than half of the trillion- dollar hole caused by the housing bubble collapse. Government stimulus was reduced even further by cuts in state government spending. Perhaps Obama could not have achieved more, but he should have chastised Congress and made clear the country would need more and soon. Obama’s inflated claim on behalf of that modest legislation is a major reason that more Federal job creation is so politically difficult.
The deficit mania has other deeper roots. A core within the business community, especially financial services, never accepted the New Deal. Social Security has always been especially offensive. It is a universal program that worked and became very popular. It constitutes the major reason poverty rates among the elderly declined dramatically. Had George W. Bush privatized Social Security, our great recession would likely have become Great Depression II.
Unable to go after the program directly, conservatives attacked Social Security through fallacious arguments that the program, which its bipartisan trustees certify as fully funded through 2044, is a fiscal time bomb. As Baker points out, the real fiscal time bombs are exploding private sector dominated health costs, the bank bailouts, and war costs of a trillion and counting. Concern about deficits has never prevented the business press or our Senators from supporting these corporate behemoths.

Paul Krugman also provocatively argues that more than immediate monetary interests drive this issue. Ideological and even identity issues are in play Krugman cites Keynes’s powerful aside on classical capitalist culture:

“The completeness of the [ the notion that government can do nothing] is something of a curiosity and a mystery. It must have been due to a complex of suitabilities in the doctrine to the environment into which it was projected. That it reached conclusions quite different from what the ordinary uninstructed person would expect, added, I suppose, to its intellectual prestige. That its teaching, translated into practice, was austere and often unpalatable, lent it virtue. That it was adapted to carry a vast and consistent logical superstructure, gave it beauty. That it could explain much social injustice and apparent cruelty as an inevitable incident in the scheme of progress, and the attempt to change such things as likely on the whole to do more harm than good, commended it to authority. That it afforded a measure of justification to the free activities of the individual capitalist, attracted to it the support of the dominant social force behind authority.”

The anti deficit mania has tangled roots both in immediate monetary interests and in the broader political culture. It has surprising support among some working class citizens, who stand to lose financially from its implementation. They are led by and in turn sustain the so- called Blue Dog Democrats. Nonetheless, its deep and tangled roots constitute no reason to treat it as inevitable. Why deficit mania cuts across class and how to construct a culture and economics that sustains full employment are among our most pressing political tasks.
The politics of private and government debt provides an occasion to contest both conventional economic theory and related moral narratives. The old story is that a profligate working class and indulgent governments spent themselves into deserved ruin. Others maintain that liberal government do gooders through the Community Reinvestment Act forced banks to make inappropriate loans to poor citizens. Yet most of the subprime mortgages were issued by banks not subject to CRA, and government support for such mortgages through Fannie Mae began only long after private banks were heavily involved. In addition, as the NY Times reports, the wealthy are now defaulting in disproportionate numbers on investment housing loans. But as Robert Reich points out, working class Americans went into deep debt because their wages didn't keep up. The median wage dropped between 2001 and 2007. Workers could keep spending at the rate necessary to keep themselves ― and the economy ― going only by borrowing, primarily against the value of their homes. The borrowing, however, ended with the bursting of the bubble. Only government can fill the void left by a consumer who is now so debt burdened as to unable to buy more than mere necessities. And in the longer run, more recessions are likely if working class incomes are not bolstered. Yet the same authorities who told consumers to borrow and spend now argue against any role for government either in job creation or redistribution.

Contemporary deficit mania has a curious, occasionally quarrelsome parentage. It includes fear of full employment, disdain for the poor and leisure, dreams of rags to riches for those who combine self-denial and luck, and a blind-- albeit selectively applied-- faith in markets.
Some wealthy have reasons to fear full employment. Even more than redistributive taxation, full employment narrowed gaps between rich and poor substantially during World War II, the late sixties, or the final years of the Clinton Administration. Full employment and steady productivity growth funded social security, private pensions, and gradual reductions in working hours, so crucial to family and to wider ranging interests.
The very success of full employment has also been its undoing. In the late sixties, Lyndon Johnson’s guns and butter economics gave us full employment. Full employment, however, also encouraged corporate pricing power, unleashed latent workplace and racial conflict, and productivity problems. Inflation rates increased and OPEC and automatic cost of living adjustments (COLAs) gave the US economy an embedded inflation. This became an occasion for a full business counterattack on the Post World War II political economy. Many businesses slashed investment and highlighted inflation and social turmoil. Confused and ever more insecure in the face of job loss and fierce cultural conflict, many of the white working class retreated to older conventions of self-reliance. The new political dynamic forced Jimmy Carter to appoint a conservative banker, Paul Volcker, as Fed chair and to inaugurate a series of deregulatory reforms continued and magnified under Reagan. Interest rates and unemployment went sky high.
These problems might have been addressed―and often were in Europe-- through wage and price guidelines, labor/management negotiation of codetermination or profit sharing schemes. . Except in war and briefly during Nixon’s administration, however, such an approach has been rejected as inefficient and intrusive by politicians. Ever since the Carter years, tales of sixties turmoil and seventies stagflation have been trotted out to blunt enthusiasm for any government initiative. Just as importantly, academic economists have constructed laws like the Phillips Curve and the non accelerating inflation rate of unemployment (NAIRU) to suggest the impossibility of achieving unemployment as low as in the late sixties. These “laws” blunted consideration of the possibility that with different institutions, social mores, and constructive engagement of racial and ethnic animosities, policies might be crafted to foster full employment without vicious inflationary spirals.
In recent US experience, only very high levels of employment in the last years of the Clinton Administration led to even modest wage gains or inflationary pressures―probably because unions had been so beaten down and workers were so traumatized. But on a more positive note, various forms of profit sharing and joint labor management collaboration in Europe can also curtail inflation under full employment circumstances. The inefficiency of curbing inflation through chronic working class layoffs engineered by government is seldom considered.
The private debt economy’s unprecedented crash gave Obama a brief window to redress these economic and moral narratives. Once his feeble stimulus disappointed, however, it became easy to revert to familiar narratives. Pundits celebrated a return to government and personal austerity, scapegoated African Americans and immigrants, and magnified the dream of rags to riches.
Congress also seems reluctant to consider inexpensive―albeit unconventional-- ways to reduce unemployment. A German work- sharing program extended tax credits (less costly than unemployment compensation) to firms that shorten worker hours while retaining wage and salary levels. It held unemployment constant even with falling GNP,

Much polling data suggests Americans are also ambivalent about the public debt. Depending on the question, some suggest jobs are more important than the deficit. Polls and economic arguments probably won’t by themselves carry the debate.
Rather than reflexively blame economic troubles on individual moral failings, the US has also periodically demonstrated deeply democratic moral commitments. In fights for unions, jobs, voter rights, and shorter hours, the Catholic social gospel, the civil rights and labor movements, and various strands of secular liberalism have collaborated. They questioned work without end, challenged gaping inequality, and broadened democratic participation. We cannot, however, revert to the post World War II consensus. For many reasons, war today is unlikely to catalyze any progressive economic consensus. Like all such efforts, the coalitions that built the post World War II consensus also had blindspots. Efforts to build on these examples would do well to attune themselves more fully to a pluralizing world where moral and social foundations are more shifting ethnic and racial lines more fluid and where new rights claims are likely to emerge.

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