Tuesday, August 9, 2011

the fixation in Washington is reducing the deficit.

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Stan­dard and Poor’s down­grade of U.S. debt should be seen as the joke it is.  The rat­ing agency, which gave in­vest­ment grade rat­ings to hun­dreds of bil­lions of dol­lars of sub­prime mort­gage backed se­cu­ri­ties, made an ac­count­ing error of $2 tril­lion in doing its as­sess­ment of the U.S. fi­nan­cial sit­u­a­tion. How­ever, when this error was called to S&P’s at­ten­tion, it still went ahead with the down­grade. Just like the war in Iraq, the pol­icy was de­cided in ad­vance of the ev­i­dence.
The non­sense with the S&P down­grade is yet an­other dis­trac­tion – after 4 months of hag­gling over the debt ceil­ing id­iocy – from the real prob­lem fac­ing the coun­try: a down­turn that has left 25 mil­lion peo­ple un­em­ployed, un­der­em­ployed, or out of the labor force al­to­gether. Tens of mil­lions of peo­ple are see­ing their ca­reer hopes and fam­ily lives wrecked by the prospect of long-term un­em­ploy­ment.
The in­cred­i­ble part of this story is that the peo­ple who are re­spon­si­ble are all doing just fine, and most of them are still mak­ing pol­icy. Fur­ther­more, they are using their own in­com­pe­tence as a weapon to argue that we have to take even more money from the poor and mid­dle class, this time in the form of So­cial Se­cu­rity, Medicare and Med­ic­aid ben­e­fits.
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The basic story is that the econ­omy needs de­mand. The hous­ing bub­ble gen­er­ated more than $1.4 tril­lion in an­nual de­mand through the con­struc­tion and con­sump­tion that it spurred. Now that this de­mand is gone, there is noth­ing to re­place it. Pres­i­dent Obama’s stim­u­lus was re­placed some of the lost de­mand, but it was nowhere near large enough. We tried to fill a $1.4 tril­lion hole in an­nual de­mand with around $300 bil­lion in an­nual stim­u­lus in 2009 and 2010. In 2011, most of this boost has been ex­hausted and the econ­omy is com­ing to a near stand­still.
If we had se­ri­ous peo­ple in Wash­ing­ton, they would be talk­ing about jobs pro­grams, about re­build­ing the in­fra­struc­ture, about work shar­ing, and any other mea­sure that could get peo­ple back to work quickly. How­ever, in­stead of talk­ing about ways to re-em­ploy peo­ple, the fix­a­tion in Wash­ing­ton is re­duc­ing the deficit.
This con­cern with the deficit is ab­surd on its face (if the mar­kets were pan­icked about the deficit, the U.S. gov­ern­ment would not be able to issue long-term debt at less than 3.0 per­cent in­ter­est), but it has the back­ing of pow­er­ful forces. Wall Street in­vest­ment banker Peter Pe­ter­son is doing a full-court press, pay­ing any bud­get an­a­lyst he can find to say how ter­ri­ble the deficit prob­lem is. The Wash­ing­ton Post and Na­tional Pub­lic Radio are also doing the full-court press, aban­don­ing any pre­text of ob­jec­tiv­ity as they high­light all the deficit news all the time – using a healthy dose of Pe­ter­son-funded ex­perts to make the case.
The real goal of this hys­te­ria is the dis­man­tling, or at least scal­ing back, of the core so­cial pro­grams that work­ing peo­ple de­pend upon: So­cial Se­cu­rity, Medicare and Med­ic­aid. It is im­por­tant to re­al­ize that this is not a tra­di­tional left-right bat­tle. Polls con­sis­tently show that peo­ple across the po­lit­i­cal spec­trum over­whelm­ingly sup­port these pro­grams and do not want to see them cut. Even the vast ma­jor­ity of Tea Party Re­pub­li­cans sup­port these pro­grams [CNN poll].
Rather than being a left-right split, this is a top-bot­tom split. There is a bi­par­ti­san con­sen­sus among the elites that these pro­grams should be cut. The guid­ing phi­los­o­phy of this drive is that pub­lic money that goes to pro­grams for mid­dle-in­come and poor peo­ple is money that could be in the pock­ets of the wealthy. For this rea­son, So­cial Se­cu­rity, Medicare and Med­ic­aid are an of­fense to their sen­si­bil­i­ties. They are pro­grams that help or­di­nary work­ing peo­ple, not the rich, there­fore these pro­grams con­flict di­rectly with their phi­los­o­phy of gov­ern­ment.
The re­mark­able part of this story is that elites are ef­fec­tively using their in­com­pe­tence in man­ag­ing the econ­omy as the core of their ar­gu­ment for cut­ting these so­cial pro­grams. After all, no one was talk­ing about cut­ting these pro­grams until the deficit ex­ploded and the rea­son the deficit ex­ploded was that the col­lapse of the hous­ing bub­ble wrecked the econ­omy.
If these elites had a clue about the econ­omy, they never would have al­lowed the bub­ble to grow to such dan­ger­ous lev­els. The econ­omy would not have col­lapsed, the deficit would be man­age­able and no one would be dis­cussing cuts to So­cial Se­cu­rity and the other pro­grams.
In other lines of work, in­com­pe­tence on the job gets you fired. In pol­i­cy­mak­ing in Wash­ing­ton, in­com­pe­tence means more re­spon­si­bil­ity and power.

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