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| President Obama and House Speaker John Boehner. (photo: Saul Loeb/AFP/Getty Images) |
Kill the 'Fiscal Cliff' Instead of the Economy
24 December 12
veryone
now agrees that the so-called "fiscal cliff" is a stupid policy that
threatens our economy and our people. Everyone agrees why the "fiscal
cliff" is stupid -- it inflicts austerity at a time when it is likely to
throw the nation into a gratuitous recession. Causing a recession leads
to increased unemployment and a larger budget deficit. We have all seen
austerity force the Eurozone into a gratuitous recession in which
Italy, Spain and Greece have Great Depression levels of unemployment.
Here's the short version of why austerity is a
self-destructive response to the Great Recession. A recession occurs
when demand to purchase goods and services falls and the economy
contracts, causing increased unemployment. This simultaneously causes
tax revenues to fall and government expenditures for programs like
unemployment compensation to increase. The fall in revenues and increase
in expenses causes the federal budget deficit to grow rapidly.
Austerity is a policy of raising taxes and/or cutting
governmental spending for the purported purpose of cutting the deficit.
If one raises overall taxes in response to the Great Recession the
result is a reduction in private sector demand. If one cuts governmental
spending the result is a reduction in public sector demand. The result
of reducing private and public sector demand in the recovery phase from
the Great Recession, where overall demand is already grossly inadequate,
is to throw the nation back into recession or even a depression. That
causes the budget deficit to grow. A policy of austerity undertaken
under the claim that it will reduce the deficit causes a gratuitous
recession that leads to a massive loss of wealth, far higher
unemployment, and in increased deficit. That is why austerity is a
policy that is the self-destructive economic analogy to the medical
insanity of bleeding patients.
We have known that austerity is an idiotic response to
a severe crisis for 75 years. The U.S. was in the midst of a strong
recovery from the Great Depression until FDR's neo-liberal economists
convinced him in 1937 that is was essential that the U.S. adopt an
austerity program to reduce the federal deficit. Austerity forced our
economy back into a Great Depression.
It was only the stimulus of federal spending in World
War II that brought the U.S. out of the depression. During World War II
and for the remainder of that decade the ratio of debt-to-GDP was at or
near historically record levels. The result was the greatest industrial
expansion in history, full employment (including a massive influx of
women), strong economic growth, and sharply declining deficits and
debt-to-GDP ratio because the growth led to large increases in revenue
and the low unemployment greatly reduced spending on the unemployed. We
also defeated the Axis powers, created Social Security and the GI Bill,
and began an extraordinary expansion of our housing stock to house the
baby boom.
We learned many lessons from the catastrophic failure
of austerity and the extraordinary success of stimulus in this era. The
U.S. adopted a fiscal system of "automatic stabilizers." These are
counter-cyclical (they push in the opposite direction of the business
cycle) fiscal effects that are designed into the system and do not
require new legislation once the recession or inflation begins. The
result of these automatic stabilizers has been to reduce the severity
and duration of recessions. Indeed, studies show that the larger the
national governmental role in the economy, the less volatile the
economy. This makes sense because the stabilization function should be
more effective if the stabilizers are larger relative to the economy.
Unfortunately, these sensible counter-cyclical
policies that make theoretical and common sense and have repeatedly
worked in the real world were forgotten by many due to a campaign of
deficit hysteria funded by Pete Peterson, a Republican billionaire
financier who has made it his mission in life to destroy the safety net.
His ultimate goal is to privatize social security so that Wall Street
can receive hundreds of billions of dollars in fees investing our
retirement funds.
I've explained in a prior column
how the fiscal cliff was created through an insane bipartisan deal in
August 2011. The fiscal cliff was always a terrible job-destroying idea
that also began to unravel the safety net by cutting Medicare. Everyone
involved in creating the fiscal cliff acted irresponsibly and inhumanely
in seeking to inflict austerity, cause a recession, and unravel the
safety net.
What is forgotten, however, in discussions of the
idiocy of creating the fiscal cliff is that it was part of a broader
bipartisan deal intended to inflict even more self-destructive austerity
and even greater damage to the safety net. The fiscal cliff was an act
of idiocy in pursuit of a policy of depravity called "the Grand Bargain"
that was actually the Grand Betrayal.
The bipartisan madness has increased since the August
2011 budget deal. Today, the parties are simultaneously screaming (1)
that the fiscal cliff is a disaster because it imposes austerity and
will cause a recession and (2) that it is essential that we agree to a
Grand Betrayal that will inflict even greater austerity and cause an
even more severe recession. Indeed, the Grand Betrayal mandates
austerity over a decade so it is likely to cause and/or deepen multiple
recessions. The Republican and Democratic variants of the Grand Betrayal
are doubly destructive and inhumane because they cut the safety net. President Obama wants to begin to unravel the safety net and cut social
programs even though an overwhelming majority of Democrats oppose it and
even though doing so will inflict even greater austerity. That will
cause a deeper recession and likely make the deficit larger, so it is as
nonsensical as it is cruel.
During this this entire financial farce I have been
unable to get the dominant media to make the most obvious point. Since
we all agree that austerity (the fiscal cliff) is a terrible idea that
will cause a recession and likely increase the deficit, we must
logically conclude that all variants of the Grand Betrayal are austerity
programs that must be defeated in order to prevent a recession that is
likely to increase the deficit. We should all be opposing any cuts in
the safety net because they would inflict austerity. An overwhelming
majority of Democrats and a majority of Republicans also oppose cuts in
the safety net as inhumane.
So why don't the Democrats and Republicans stop trying
to do a deal that will inflict austerity? Why not simply repeal the
Budget Act of August 2011? That would kill the fiscal cliff. Repeal
would kill austerity, prevent the recession, save the safety net,
increase growth, and shrink the deficit. All versions of the Grand
Betrayal (Republican and Democratic) inflict austerity, are likely to
cause a recession, begin to unravel the safety net, destroy growth, and
increase the deficit.
Under the same logic we should be able to agree on two
related actions -- renew the extension of long-term unemployment
compensation and renew the moratorium on collecting the payroll tax.
These policies are superb counter-cyclical programs and have the added
advantage of reducing human misery and inequality. Republicans and
Democrats have agreed in the past on the desirability of both actions.
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