May 26, 2011 |
Americans are increasingly confused about what the national debt is, and how it effects the economy, but that's no accident; we're being hoodwinked by politicians with a massive assist from the corporate media. Even worse, they're waving the deficit around like a shiny object to distract us from the really pressing issues facing our economy.
Here's some reality: according to the Congressional Budget Office, projected “budget deficits will drop markedly over the next few years” — falling by around two-thirds by 2014 (less so if the “Bush tax cuts” aren't allowed to expire as scheduled). This fact is not all over the news.
In fact, while the deficit is on a relatively steep downward slope, just this week the Washington Post told its readers in a front-page news story that Democrats and Republicans have been “lambasted as being far too timid in dealing with the nation’s swelling deficit," and the New York Times reported that Congress is trying “to cut spending to deal with America’s own ballooning deficit [emphasis added].” These weren't editorials or opinion pieces; they purported to offer factual news.
That just scratches the surface. In 2009, the Post came under fire for running an article – also in its news section – written by the Fiscal Times, which the watchdog group Fairness and Accuracy in Reporting described as “a propaganda outlet created and funded by Peter G. Peterson, a Wall Street billionaire and Nixon administration cabinet member who has long used his wealth to promote cuts in Social Security and other entitlement programs.” (It was Peterson Foundation employees, among those from other outside groups, who staffed Obama's “bipartisan deficit commission.”)
After years pushing the inherently conservative "sky-is-falling" deficit narrative, the Washington Post now tells us that, based on the results of a poll it conducted last week, “lawmakers are likely to face voters’ wrath if they can’t prove that they are also working to rein in the spiraling debt.” The poll actually found that a majority of respondents would rather default on the national debt, driving the economy into a deep recession and sending unemployment skyrocketing, than see the debt limit raised.
That's madness, and it results from what one of the paper's liberal bloggers, Greg Sargent, describes as a “deficit feedback loop,” in which “the relentless bipartisan focus on the deficit convinces voters to be worried about it, which in turn leads lawmakers to spend still more time talking about it and less time talking about the economy.” Sargent highlighted a study released last week by the National Journal that confirms his thesis. According to the Journal, “major U.S. newspapers have increasingly shifted their attention away from coverage of unemployment in recent months while greatly intensifying their focus on the deficit.”
The analysis -- based on a measure of how often the words "unemployment" and "deficit" appear in major publications -- portrays a dramatically shifting landscape of coverage over the past two years, as the debate over how to fix the federal deficit has risen to prominence and the question of how to handle still-high unemployment has faded from the media's consciousness.
Now look at the impact that relentless focus on the deficit – and declining coverage of the jobs crisis and housing meltdown -- has had on public opinion:
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How Does the National Debt Affect You, Personally?
It's no wonder Americans are so bewildered – polls show they want the deficit cut, but they don't want to see taxes go up or cut any programs other than military spending (which wouldn't alone balance the budget).
And while the media's focus on the deficit has increased dramatically in recent years, this is nothing new. Conservatives have spent the last 30 years pushing all manner of distortions about taxes, spending and the national debt – the stuff lies at the heart of their “supply-side” economic pablum.
An exchange at a town-hall style debate way back during the 1992 presidential campaign spoke to the cumulative effect of that mendacity. A woman in the audience asked the three candidates – Bill Clinton, the senior George Bush and Ross Perot – how “the national debt personally affected each of your lives?” The question famously stumped Bush, who said, “I'm not sure I get it. Help me with the question and I'll try to answer it.” But the exchange also prompted political scientist Jonathan Bernstein to posit that many Americans, “have no idea that 'deficit' refers to the difference between federal government revenues and federal government expenditures, but instead use it as a synonym for 'bad things in the economy.'"
So what is the debt's impact on ordinary people? A truth rarely spoken in the corporate media is this: any way you slice it, adding a dollar of public debt puts a dollar into the pockets of American households.
Let me repeat that: There is a 1:1 ratio between adding public debt and private wealth, any way you want to look at it. If we had paid enough taxes to cover the services we enjoy, we wouldn't have any debt, but we would have less money. As conservatives always point out, a dollar in taxes is a dollar less in our pockets.
Similarly, if we cut public services, we'd save the government some money, but people would have to pay for the things it provides out of their own pockets. Consider the GOP's Medicare plan for example. As the L.A. Times noted, “even as the federal government cut its own spending, seniors would end up paying almost twice as much out of their own pockets — or more than $12,510 a year, the CBO estimates.” The same is true for subsidized student loans – we could cut them, saving some public dollars, and every one of them would be added to graduate student loan debt (two-thirds of college grads now leave school with an average debt of $24,000). We could cut programs for the poor, which would save public money, while making them poorer.
That's true of virtually everything under the sun, including spending conservatives tend to like and progressives usually hate– killing a dollar in corporate subsidies also kills a dollar in corporate profits; a buck less in military spending is also one less greenback for defense contractors and soldiers.
Now, it's true that more debt requires higher interest payments, but here again we have a 1:1 ratio. If our household debt was higher as a result of paying more out-of-pocket, then we'd have to pay more interest as well. The only difference is that with public debt, the interest burden gets spread over our entire society – including rich people like Pete Peterson – instead of only bankrupting those among us who have fallen on hard times or had a string of bad luck.
This gets to the crux of the progressive argument. The number one reason we're seeing elevated deficits right now is the recession itself. In a consumer-based economy, the way to decrease those deficits is to grow one's way out, which isn't going to happen by taking money out of Americans' pockets while demand is still in the hole.
OK, So How Do Deficits Affect the Economy?
Let us consider two dueling narratives, one for which there is no real-world evidence at this time, and another one that can be demonstrated empirically.
The first is the deficit hysterics' dark warnings that high deficits will push interest rates up, making it harder for companies to borrow money to expand and ultimately costing the economy jobs. This is known as “crowding out” private investment, and it may be the case in certain circumstances. But, as economist Jared Bernstein notes, it's “not a plausible story with excess capacity, the Fed funds rate at zero, and companies sitting on cash that they could invest with if they saw good reasons to do so.”
We've run high deficits in the past couple of years, but as I noted a few weeks ago, the Fed's discount rate -- the interest charged to financial institutions -- now stands at 0.75 percent while a year ago, it was … 0.75 percent. The prime rate -- the basis for setting the amount of interest charged for mortgages and consumer credit -- stands at 3.25 percent. A year ago, it was 3.25 percent.
Economist Paul Krugman put it a different way, noting that the interest paid by Germany, which is running a deficit equal to 3 percent of its economic output is essentially the same as what we're paying with a deficit equal to 10 percent, and also similar to that paid by the UK, which has a deficit similar to our own but has launched a panful “austerity” program.
A more realistic narrative, demonstrated repeatedly since at least the Great Depression, is that when the economy is in a hole and consumers are tapped out, spending public dollars – and running deficits in the short term – minimizes the pain felt on Main Street. Cutting spending, as the deficit hawks want to do, simply increases the hardship.
Bernstein points out how this dynamic is playing out in the states, where spending cuts have led to the loss of 300,000 public sector jobs, which is creating a drag on growth. All of those people will have less money in their pockets to buy goods and services. Some will miss mortgage payments or face foreclosure, their personal debt will increase, and all of that leads to less demand overall – a vicious cycle if ever there was one.
What Else Could the Media Be Telling Us?
Journalist Sally Kohn pointed out this week that the U.S. has a debt-to-income ratio far smaller than most corporations, a fact that is as rarely reported as the deficit's downward projections. We have a dollar in public debt for each dollar we're taking in as a nation, while companies like IBM and Caterpillar are running debts four times their incomes, and JP Morgan Chase has borrowed 50 times what it makes in a year. Corporations are fine with that, as their debt represents investments that will pay off in the future, and we should be similarly content to invest in infrastructure, education and keeping the economy growing – it'll also pay off down the road.
But perhaps the biggest distortion in our discourse on deficits is the idea that, like fungi, they just grow naturally rather than arising as a consequence of policy choices made by our representatives. As I've written before, we don't have a structural economic problem called a “deficit.” Aside from the recession, we're running high deficits now for three reasons.
First, we're under-taxed – after endless rounds of tax cuts, the federal government brought in the lowest amount of revenue last year since 1950. Second, we have a ripoff of a health-care system – if we spent the same amount per person for health care as any of the 35 countries with longer life-expectancies we'd be looking at large budget surpluses in the near future. And, finally, we spend a wildly disproportionate amount on our military. As economist Dean Baker notes, the dreaded “Medicare gap” is equal to just one-fifth of the increase in our military spending since 9/11.
And while the dominant deficit narrative sets us up mostly for spending cuts, if there was the same emphasis on any of those real-world causes for the debt, it would lead to different, and far more progressive approaches to the issue: cutting defense spending, restoring at least the Clinton-era tax rates on the wealthy and making deeper reforms to our overpriced health-care system.
Put simply, we're being conned. So, whatever you do, don't buy into the media-driven hysteria.
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