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Tuesday, April 5, 2011

Understanding Deficits & Debt or Putting America on a Real Budget


Understanding Deficits & Debt or Putting America on a Real Budget

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America’s deficits and debt are poorly understood because they are rarely put in historical context. A balanced budget was easy in the nineteenth century when cheap resources, cheap labor, mechanized agriculture, mass production, and an easily manipulated all-male, corrupt franchise yielded a highly productive economy and a rising standard of living. The Great Depression and World War II ended that world.

By the 1970s, other countries had modernized their industrial plants while America’s rusted. In any case, why bother with an industrial policy when the burgeoning service economy was brimming with opportunities? No one realized at first that the service economy, along with more costly resources and environmentalism, could not match the productivity of the industrial era. And democracy took a significant step forward: the one-person, one-vote act of 1964 made it much more difficult — but not impossible — to control the electorate. The 1960s also saw significant additions to government programs as hitherto neglected portions of the population began to receive attention.

Market fundamentalism from the 1970s to 2008 saw the emergence of a low-wage, stagnantwage economy, an economy that for the first time in American history could not raise living standards. It saw lax law enforcement, deregulation, and an onslaught against trade unions and workers. It saw women flock to work as single breadwinner jobs disappeared. It saw increases in wealth and income inequality, underutilized labor, poverty rates becoming the highest in the developed world, a neglect of public services and goods, open disregard for the environment, the loss of industrial jobs, and the rise of a swollen, irresponsible financial sector, much of it caused by irresponsible tax cuts and the upward flow of money because of the weakness of labor. The shift to a Risk society saw a mania for gun ownership, a large rise in bankruptcies, and domestic and other forms of violence. It was a period of phony booms and real busts. It was an era of deficits and debt as all borrowed to make up for the shortfalls of the unmanaged, undirected, less productive service economy. The era of market fundamentalism was not only characterized by deficits and debt but by Ponzi-like public budgets — a term used by Daniel Schavio, Do Deficits Matter? 1997 — as America put onto future generations the cost of its wars, its use of nature, its infrastructure maintenance and upgrading, its private and public retirement systems, and its health care for the elderly and poor. Deficits and debt were the solution and still are to reconciling three incompatibles: American-style capitalism with low-taxes on the wealthy, high levels of corporate welfare, and priority attention to business; a democratizing political system; and a lower-productivity service economy.

The deficits and debt did not matter at first because those who counted believed market fundamentalism guaranteed a high-growth economy. The business world’s faith in the metaphysics of “free markets” led it to pursue anti-labor union practices, thus violating the first principle of capitalism, that people should see a correspondence between their work and their rewards. The result was a less productive economy, and the value of worker participation in the work process and overall firm is well documented; a loss of wage-generated demand; and a surplus of money for the bloated, unregulated financial sector to speculate with.

Vigorous debates about the federal budget ensued when public debt levels grew and deficit spending became chronic. These debates were and are wholly misguided for a number of reasons besides the failure to put them in historical context, the most important of which is that the federal budget is invariably evaluated in terms of its impact on the principles allegedly governing our economy, for example, that high taxes weaken the work ethic and that private borrowing and spending is always better than public borrowing and spending. Regardless of party, analysts have this relation backward. The private economy does not obey the principles in economics textbooks. Every sector of the economy as well as the professions, the non-profit sector, and education are deeply dependent on government support. It is this process that warps and undermines the federal budget, not the usual carping about inefficient government spending for welfare programs, and a smaller version of this process occurs at the local and state levels.

Given an unmanaged, less productive service economy and a broadened electorate, legislatures were asked to cover the shortfalls in all sectors of the economy and society and to make costly investments that were too risky for private capital. At the root of these demands on government is the lack of steady, broad-based demand — by business, consumers, and government — for the monstrous diversity and volume of goods and services that an unmanaged economy inevitably leads to. The onslaught against labor backfired as consumer demand slackened. As Keynes pointed out long ago, the capitalist economy is not a smoothly functioning system in which investment money flows in needed directions to stimulate broad-based, adequate demand, more investment, and more demand, guided by rational markets. In an undirected economy and society what everyone faces is a tangle of uncertainty. What everyone experiences is multiple insecurities. As Keynes also noted, this leads to investor hesitation and even disengagement, especially by the wealthy. The problems with market fundamentalism go much further. There are many acts with economic consequences that are neither rational nor primarily economic in nature. Private and public spending go far beyond the satisfaction of wants, a bedrock principle of conventional economics: spending for nebulous local purposes, unnecessary wars and armaments, and for prestige purposes, for example sending humans to the moon, outsized homes and cars, luxury goods and services of all kinds. Put differently, there is not enough public investment of the right kind and at the right time to keep existing private and public investment busy and productive: infrastructure maintenance, research, and eduction.

Instead, and lacking paying customers, interest groups demanded and got help from the state. After the Great Depression the state continued to support business and the profit system, but because of democratization it could no longer ignore the worker, the unemployed, the poor, and the environment as it did in the nineteenth century. In addition to huge sums for corporate welfare, considerable funds had to go for worker retirement, health care, and the poor. There were also tax expenditures to support private charities, foundations, schools, and housing, not so much to make sure that certain things got done but to make sure that government was not asked to do them. A large low-wage sector emerged, and millions of full time workers fell into poverty. Millions of able bodied male workers, who were discarded by the chaotic shrinkage of the industrial sector, after using up their unemployment insurance money, went on the disability rolls. Some accepted lower paying jobs as laissez-faire theory says they should, some resorted to crime, and some stoically waited for the return of the industrial era. America’s multinational corporations prospered thanks to free trade ideology and tax cuts. Their success helped to establish and maintain a low-wage, stagnant- wage economy because they supplied America with cheap goods manufactured elsewhere, leading to growing, chronic foreign trade deficits. To develop and protect the entire globe as a profit generating arena, a huge military was needed. Twenty-five percent of current corporate profits come from abroad. With a business culture contemptuous of government, with high unproductive competitive pressures, and with meaningful labor force participation much lower than official rates, crime, divorce, and other inefficiencies flourished. Accordingly, large, unproductive sums had to be spent on litigation, law enforcement, incarceration, and security by private and public forces, one third more than in better-run societies, and on assorted charities. The state also responded to various demands for more credit. The Fed, mortgage and credit card companies, hedge funds, subprime lenders, Congress, and the executive each does its best to satisfy its supplicants, with no one keeping an eye on the overall process. Some credit is forthcoming to finance for-profit businesses, some useful, some not, some obviously dubious: start ups, mergers, acquisitions, foreign investment. Some credit goes to small business resulting in considerable good and many nonproductive bankruptcies. Some goes into productive ventures like computers and homebuilding, but substantial amounts go into subsidized over-sized homes, sports arenas, private limousine/airplane/helicopter services, and golf courses. The undirected economy is fitfully energized by erratic credit flows, unregulated domestic and foreign investment money, asset bubbles, and by an anemic, top-heavy income structure.

The result is not a vibrant America of dynamic entrepreneurs but an economy teeming with every conceivable kind of for-profit and non-profit business, an amount that exceeds the ability of consumers, businesses, and government to support. Thus emerge lobbying to get government to spend money it does not have, desperate companies that bribe officials to get grants and contracts, desperate local governments that lure companies with tax breaks they cannot afford, huge unproductive sums spent on advertising to attract scarce consumer dollars or whip up a taste for the unknown. Market shortfalls and insecurities also result in shady shortcuts throughout the economy, such as price fixing, collusion among firms, and cooked books, or between government and the private world, such as secretive contracts to for-profit companies to do public work, deliberate nonenforcement of labor and environmental laws, secretive loan guarantees, and off-budget entities. The shortfall in overall demand inevitably leads to large and growing indebtedness by business, citizens, and the state, an indebtedness that goes untallied in its totality or by kind and therefore cannot be related to revenues by kind, not that anyone is inclined to do this because it sounds like social planning.

Total long-term or structural social debt in relation to total structural social revenues forms the essential thermometer of social health. Separating myth and reality also requires a federal budget that distinguishes between investment and overhead costs, and takes inflation, assets, and asset appreciation into account. Federal deficits and debt largely disappear under sensible capitalist bookkeeping, as in the analysis by a mainstream Republican economist, Michael J. Boskin, “Sense and Nonsense about Federal Deficits and Debts” in Joseph E. Stiglitz, Aaron S. Edlin, and J. Bradford DeLong, eds., The Economists’ Voice (New York: Columbia University Press, 2008). Along with clear indicators (Daniel Schavio, Do Deficits Matter?) of cash flow, accrued obligations, inflation, public assets, taxing power, tax lags, tax expenditures, generational impact, and historical context, and along with a careful avoidance of loan guaranteeing, off-budgeting, trust funding, and earmarking chicanery, the simple distinction between investment and consumption would allow the public to gain its footing not only over its finances but over public policy.

The gap between spending and revenues could then be seen as a society-wide problem and its solution sought, not from experts, science, logic, or the principles of any economics but from politics. Politics means decisions made by a fully democratized polity based on historical experience, common sense, value judgments, experimentation, and majority rule. Put differently, America has to go on a real budget and make decisions about what spending, private and public, is productive, necessary, and affordable. Impossible, you say, and you may be right. The impossible might become easier, even doable, however, if our many nonperforming economic principles — private investments are always better than public investments; economic growth in the abstract leads to a higher standard of living; markets can do our thinking and deciding for us — were jettisoned. With a vibrant polity, unburdened by irrelevant principles, a democratic people could make decisions to curb unproductive spending in both the public and private realms. America could put itself on a real budget by directly tackling practices and policies that are causing ever larger leaks in our Ponzi-like social budget, especially those that generate the developed world’s leading social pathologies and inefficiencies: energy, crime, health care costs, poverty, divorce, mental illness. The gap between social spending and revenues over the past fifty years is also misunderstood because of America’s monopolistic world of exceptionalism. Why should a special, God-favored people be on the lookout for best practices elsewhere? Also contributing to the inability to think clearly are America’s many deeply flawed indicators: GDP, productivity, unemployment, poverty. As the debts pile up there is an effort to bring public spending and revenues into alignment with tax caps, constitutional amendments requiring a balanced budget, supermajorities, cuts in Medicare and Social Security, squeezes on the poor, denial of service, charter schools, and malfeasance, but to no avail because the focus is on the wrong place. In this context, no one asks, why do we have millions unemployed and underemployed even in what are considered good times? Is the failure to achieve full employment not the number one cause of structural deficits and debt and the cause of many other problems? We tolerate unemployment because our number one priority must be to fight inflation and to do so without government planning. We tolerate unemployment because we must keep labor costs low and that means keeping labor weak. Beyond the priority of full employment, should we not be looking into the inefficiencies of our clogged, uncoordinated transportation systems? Should the IRS not go after tax evaders, especially since tax evasion per year equals the cost of Medicare per year? There are nonproductive scams everywhere, for example, many nonprofits, title insurance, and work credentials: why is there no action against them in the name of reducing deficits and debt? All in all, a Micawber-like America, guided by imaginary principles, misled by faulty indicators, puffed up by exceptionalism, and coasting on creative chicanery slowly strangles on the fear of unstoppable debt and makes more bad decisions. An unmanaged economy combined with even a moderately democratized polity cannot help but become a societal Ponzi scheme, or perhaps better said, a deadbeat relying on dead reckoning.

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