The country has just passed through a long debate to reach a doubtful end. Indeed, it is not really an end at all, but a mere postponement of the fight, a fight that will last through the next elections at least. Hence, we will spend the next year and a half witnessing a debate over debts. All other business of government will be pushed to the margin. Some will argue that this is necessary, because the debt—and the debt limit—is the most pressing business of government, an issue that determines all other issues. Further, they will point to the turmoil in Greece, and the coming turmoil in other Eurozone countries, with the “bond vigilantes” demanding high interest rates to purchase their risky debts, and imposing stiff austerity measures on these countries. And finally, they will make an analogy to household and business budgets, where people are expected to “live within their means.” But most of all, these debates are driven by a belief that the government is too big and taxes too high, and that shrinking both will lead to the prosperity that has eluded us for the last three years at least.
But let me suggest that the debate is wrong-headed and deals with the wrong issues, issues that have little effect on our real problems. What really bothers people when they get out of bed in the morning is not the federal debt, but the uncertainty over their jobs, presuming they have them. But 15 million people don’t have jobs, and millions more are underemployed, with part-time work or work below their skill levels. And even among the employed, there is great fear, since their bosses have demonstrated to them, over and over again, that they are disposable commodities, to be instantly cast off if the Chinese workers make a better offer, or if the shareholders demand a higher return. Over and over again, they are reminded that they are but bit players in the economy, cogs in a vast socio-economic machine over which they have little control and no voice. And they see clearly, far more clearly than their leaders, that there is little likelihood that the economy can provide the missing jobs or return to them their lost security.
“But surely,” you say, “the debts affect our jobs?” That is correct, but you would be dealing with the wrong debt. The problem with jobs shows up in the trade deficit, the money we actually owe foreigners for the goods we import, but don’t earn enough to pay for. This should be the focus of the discussion. This is the real accounting of real jobs lost and real debts incurred; yet one never hears about it.
But again you might say, “Won’t the federal debt lead to the same problems as we see in Greece?” The answer is that we won’t have the Greek problem because we don’t have the Greek debt. Their debt is owed mostly to foreigners (57%) and payable in what is, in effect, a foreign currency, the Euro. The hard lesson that the Greeks are learning is that the loss of one’s own currency is the loss of one’s own sovereignty. The Greeks owe “hard” money to hard men, men willing to extract hard concessions and high interest rates from people who were not involved in the debacle.
Our debt is not comparable. In the first place, only about 31% is owned to foreigners, and they are not about to “foreclose.” In fact, they are very comfortable with American government bonds, and are willing to buy more of them at low-interest rates. Throughout this discussion, and despite predictions of Greek-level interest rates, bond yields went down, not up. The 10-year Treasury is yielding a measly 2.56% as I write this, which indicates that the bond market, unlike our own “leaders,” have very few worries about our debts.
The second difference is that roughly 40% of our “debt” is really just inter-fund transfers, that is, money one department of government owes another; the government is the biggest holder of its own debt. The Social Security and Medicare funds hold $2.7 trillion. There are some problems there, most immediately with the Medicare fund, but that has different causes and different cures.
Another $1.7 trillion is held by the Federal Reserve System. This is the oddest part of the “debt” since the money does not represent funds that anyone loaned the government; rather they are just “credits” that the Federal Reserve “printed” out of thin air, or rather, pressed a few buttons on a computer. For all I know, Bernanke has an app for that on his iPad. The Treasury pays interest on these funds, but because the Government owns the Federal Reserve System (but not the 12 Federal Reserve Banks—it’s complicated) the monies earned come back to the Treasury. So this isn’t really a “debt” at all, but a series of accounting entries. As Senator Rand Paul pointed out, the Federal Reserve could simply tear these “debts” up and instantly reduce the deficit and avert the phony “crisis.”
Since foreigners buy our debt in our currency, they are unlikely to “get tough” with us as they have with Greece. “Want your money back? Fine, we’ll print you some more.” Maybe Bernanke has an app for that as well. It might have mildly inflationary results, or it might simply force other countries to buy more goods here and thus increase employment. In any case, it is unlikely to happen. But they don’t want it back, and seem quite happy with their paper-thin interest rates.
As for the analogy with household budgets, this is accurate, but I know of few people who buy their homes or cars in cash, or who don’t depend on credit to send their children to college, or even to make it through to payday with their credit cards. To equate “living within your means” to “buying everything in cash” establishes a standard that few of us would meet.
As for the effect of the deficit on jobs, we cannot cut billions and billions of dollars without cutting thousands and thousands of jobs. And the more jobs we cut, the greater the impact. Greater burdens will be placed on both the federal and the state governments, as people apply for unemployment benefits, lose their health care, and require greater use of public and private social services. And layoffs beget layoffs; with fewer customers to buy goods, producers require fewer workers to produce them. The plain and unavoidable fact is that our late-stage capitalism is incapable of employing all of our citizens. In seeking maximum profit alone, rather than reasonable profit and a healthy economy, the capitalist gets his wish; the stock market soars while the nation tanks. We are becoming a two-track society, with one (small) group doing very well, while the rest sink into greater insecurity. Indeed, the top 10% commanded nearly 50% of the nation’s income in 2007, a level not seen since 1929. The Great Depression reduced the disparity, so that the top share sank to about 32%, and stayed there until the early 1980’s; this was the period of the “The Great Compression” when the United States became one of the most egalitarian—and productive—societies in history. But in the current recession, the percentage of income going to the top actually increased; instead of a compression, we got an increasingly widening gap. Somebody got a bailout, but it wasn’t you and me. The situation is worse than ever, and ripe for a “double-dip” recession.
In other words, Obama has failed to address the underlying problem, and the Republicans are talking about the wrong issue; the President elected for his eloquence has remained silent. But it is somewhat amazing, to me at least, that Obama is in this position. This debate began last December, after the Republican “shellacking” of the President’s party. Nevertheless, the President still held all the cards; the Bush tax cuts were about to expire by law and the Republicans, even with their new majority in the House, did not have the votes to override a Presidential veto. If he was going to trade the scheduled increase away, he might at least have got something substantial in return, like an agreement to raise the debt ceiling and avoid this meaningless and debilitating fight. Instead, he merely got the Republicans to agree to what they had to do anyway: pass a budget, which they only did in drabs and dribbles.
All this was in line with the Republican belief that the simple solution (to every problem) is to reduce taxes. But if this were going to work, it would have worked already. The Bush tax cuts reduced taxes to their lowest level since the Second World War; we should therefore be in the midst of a boom. But the only “boom” we experienced was the housing bubble, fueled mainly by cheap credit supplied by the Fed, and financial manipulation ignored by the regulators. During the bubble years, the only real growth, apart from construction, was in health care, education, and finance. The rest of the economy was actually shrinking, especially manufacturing.
As for the budget, it is under the control of Congress, which has the exclusive power to tax and spend. But the Republicans do not trust the Congress, even—or especially—when they control it. They know full well that the bulk of the debt that has been built up since the Second World War occurred under Republican administrations. Hence, they want some sort of “automatic” mechanism. But this never works, because there must always be a way to make exceptions, and pretty soon every expenditure becomes “exceptional.” This is what happened to the so-called “paygo” rules (“pay as you go”) of the 90’s. In order to make real spending cuts, the Republicans will have to muster the political will to take difficult stands. The “Starve the Beast” strategy of relying on tax cuts alone to force the government to shrink—a strategy in place since the Reagan administration—hasn’t worked, because the beast is just as happy to fatten himself on credit as he is on cash. Speaker of the House Boehner may weep hot tears over the debt, but it is a debt composed of the annual deficits that he himself voted for, year after year.
The Republicans played poker with Obama again in the most recent deal, and again Obama folded. All he had to do was offer some reasonable plan, and then take the case to the public. He could then present the GOP with the option of accepting it (with cosmetic modifications of course, for the sake of “bipartisanship”) or shutting down the government. The Republicans know, from the last time they tried, that it doesn’t sit well with the public, and they would have taken the deal, Tea-Partiers notwithstanding. But Obama had no plan to present, and therefore nothing to say; once again he folded his hand, and accepted the Republican plan.
That plan raises the debt ceiling in stages, giving Obama many more opportunities to fold; the Republicans have decided that they like this game, and given the quality of their opponent, who can blame them?
Well, we all can. The “plan” guarantees that we will be talking of nothing else, and certainly nothing else important. This despite Obama’s promise to “pivot” towards jobs. This would be the eighth such “pivot” of his administration, each one more pitiful than the last. The current jobs plan involves changes to the patent laws, continuing cuts in payroll taxes, new free trade agreements, vague promises to improve education, and an “infrastructure bank.” But trade agreements are part of the problem not the solution, and there are no funds for the infrastructure. That leaves the President—and the nation—with nothing. Hence it is likely that we will see a double-dip recession before the Spring and perhaps even before the New Year. And it won’t really be a “double-dip”; it will just be a continuation—and deepening—of the recession that started at the end of 2007, the one that he promised to heal.
The candidate of “hope and change” turns out to be hidebound and hopeless. In truth, he needs some of that Sarah Palin, “Don’t retreat, reload” spirit. But he seems to be out of ammo, and has very little understanding of the situation. Pivot he may, time and again, to jobs question, but he seems to have little to say after each pirouette. This is partially a problem of a young man who has little experience in government. Even Sarah, with her half-terms as mayor, commissioner, and governor, has more administrative experience than the President.
What needs to be done is to renegotiate our trade deals and let the dollar find its true level. For any country with whom we are running an immodest trade deficit, they must be required to accept more of our goods or face punitive tariffs until the balance is redressed. This would encourage local manufacturing, and without making things, no nation can become prosperous, and certainly not prosperous enough to pay its debts. Further, the foreign profits of American firms must be taxed. As it is, we are actually subsidizing the outsourcing of American jobs. Some would complain that this would lead to a “trade war,” but the truth of the matter is that we are already in such a war, and we are losing badly.
Televised poker tournaments have become very popular. I’ve never been attracted to them myself, but I would be willing to chance it if I could be guaranteed that Barack Obama would be my opponent. I’m pretty sure that even if he is dealt all the aces, I can get him to fold against my pair of deuces.