May 12th 2010

Progressives and the Deficit

by Robert Creamer

Robert Creamer is a long-time political organizer and strategist and author of the recent book: "Stand Up Straight: How Progressives Can Win," available on amazon.com.
It would be easy for Progressives - even with the best of intentions - to fumble the growing debate on the federal deficit. Here are six rules for how Progressives should approach the issue in the months ahead:

1). Progressives won't get anywhere defending ever-expanding federal deficits. After all, Progressives don't believe in ever-expanding federal deficits. Remember that the last time the fiscal outlook for the federal government looked bright was under Democrat Bill Clinton. That resulted from an increase of taxes on the wealthiest Americans - and a foreign policy that did not feature two major wars.

We need to remember that politically, the federal deficit is a kind of Rorschach test for the voters. To some people it represents government that is too large. To others it represents an out-of-control economy that has turned against them. To others it is a stand-in for political irresponsibility - for the feeling that they play by the rules and are held responsible for their actions, but the political and economic elites are not.

Virtually no one considers long-term federal deficits to be a good thing, so in the political debate it would be crazy for Progressives to appear to be defending them.
Instead we should make it completely clear that we share the view that long-term deficits must be brought under control - the real question is how. There are a number of fiscal glide paths that reduce federal deficits over the long run.

2). We must insist that each of the alternative paths to reduce the deficit be evaluated using one key measure:
How will it affect our success at creating widely shared economic growth?
Remember there are two components to this question.
· How will it affect aggregate long-term economic growth?
· How will it affect the distribution of that growth - and the overall distribution of the goods and services produced by our economy?

Controlling the long-term budget deficit is not an end in and of itself. It is a means to an end. It is part of an overall strategy for creating widely shared economic growth for the American people.
That's why people who say "we have to tighten our belts to lower the deficit" - or "we can't afford to invest so much in education" - have got it all wrong.

We need to control long-term federal deficits in order to prevent ourselves from having to "tighten our belts" and we need to do it in ways that achieve that end.

Economic history shows clearly that if economic growth is not widely spread, it won't last very long. The discipline of economics discovered a long time ago that for economic output to grow over time, you need consumers who can afford to buy products.

The Bush years showcased the policies that don't work to grow the economy or reduce the deficit. Bush took office with a growing economy and budget surpluses. He left office in the midst of the worst economic collapse since the Great Depression and exploding deficits. Case closed.
The reason his policies were such failures was that all of the economic growth generated in his eight years in office went to the top two percent of the population. His policies featured an economic assault on the middle class standard of living and a reliance on a credit bubble to fuel increased demand until the bubble burst and the economy fell off a cliff.

3). In the short term - in order to dig our way out of the economic catastrophe that Bush and his friends on Wall Street left us -- America needs more spending on jobs and economic growth. We need an expansionary economic policy now in order to jumpstart long-term growth for the future.
The costs imposed on the economy by short-term deficits are nothing compared to the costs of the lost productivity that result when huge chunks of the workforce do not engage in productive activity. The deficit that is most fearful for an economy is the difference between the potential output of the economy and its actual output. That deficit results in sheer waste - lost goods and services that will never be recouped - lost production that will never be recovered.

We have learned from economic history - and John Maynard Keynes - that to put people back to work when the economy collapses requires that we create large amounts of government demand. That inevitably results in large near-term federal deficits.

The Great Depression did not really finally end until Emperor Hirohito's bombing of Pearl Harbor gave American politicians the will to spend at levels that had previously been unheard in order win World War II. The American economy was cranked up to full capacity. That spending set the stage for the longest, most widely-shared period of economic growth in American history.
Right now, to recover from the Great Recession, we need more spending on jobs - not less. The economy is finally creating jobs, but eliminating the deficit between our economic potential and actual output requires more government stimulus - not less.

That's not only true economically, it's true politically. The single greatest concern of all voters is the creation of more jobs. That requires that Democrats fight for large job programs like those proposed by Congressman George Miller. And economically it requires that the federal government increase support for ravaged state governments that are deflating growth in the overall economy by making major cutbacks in everything from education spending to police protection.

4). Right wing proposals to control the deficit don't meet the test. There are plenty of proposals for controlling long-term deficits that meet the test of creating widely shared economic growth. But the current push by Wall Street fiscal hawks to cut the long-term deficit by reducing payments to retirees on Social Security, or cutting back on critical programs like education, don't meet that test
.
Short-changing education undercuts the principle investment that will actually create long-term economic growth. It is like eating the seed corn. We must increase - not decrease -- investments in education at all levels to turbo-charge economic growth over the next two decades.

Cutting Social Security payments does nothing but diminish the wide distribution of income that is essential to sustain long-term growth. As important, it's just plain wrong. People who have worked all of their lives and played by the rules deserve a decent retirement.

In 1969, the U.S. per capita Gross Domestic Product (our nation's output of goods and services per person) was $20,994. Adjusted for inflation it had more than doubled by 2009 to $41,646. It makes no sense to argue that we can "no longer afford" the same pension and retirement benefits today that we have had for the last forty years when we generate twice as much output per person. The problem isn't that we can't "afford it". The problem is that the wealthiest people in America have kept a substantial portion of that income gain for themselves.

Frankly, I'm getting pretty sick of hearing guys who make ten million dollar bonuses on Wall Street tell Social Security recipients who make $13,000 a year that they have to "tighten their belts" because we "can't afford them."

Let's remember that the Wall Street types that make deficit reduction an end in itself are the same geniuses whose reckless speculation caused the collapse of the economy, cost eight million Americans their jobs and cost retirees tens of billions in pensions. You don't see the people who caused this catastrophe "sacrificing" or "tightening their belts" for the good of the national economy.

Many of them parade around like they were wise old flinty grandfathers, and paragons of fiscal rectitude. In fact, the whole financial sector just spent the last decade behaving like spoiled, reckless teenagers who got their inheritance too early.

None of them has any credibility lecturing seniors about fiscal conservatism or "tightening their belts." In fact, one element of any responsible plan to reduce the long-term deficit involves big increases in the taxes on what speculators, Wall Street bankers, and idle heiresses pay for the benefit of living and prospering in our society.

Some of these same people advocate a "grand bargain" that cuts Social Security or Medicare in order to show the "business community" that Democrats are serious about reducing the deficit so that they will agree to some increase in taxes. Of course when it comes to Medicare - and all heath care - we need to do everything we can to rein in rising costs. But that has nothing whatsoever to do with limiting the availability of health care to every American. We just fought a major war on that subject and won.

And Social Security can be made sound simply by increasing the cap on incomes that must pay Social Security taxes to include the top earners in America.

In fact, it is ridiculous to think that Democrats need to demonstrate our fiscal bonafides to anyone. It was Democrats who actually controlled the long-term deficit and generated surpluses and prosperity. It was the Republicans, Wall Street and the economic policies advocated by the

Chamber of Commerce that resulted in economic collapse and exploding deficits.
We must always insist that whatever economic path is taken to assure long-term fiscal soundness in the future meets the test - will it stimulate widely shared long-term economic growth?

5). To assure we meet this test, we must eliminate the confusion between investment and consumption in our federal budget.
Right now, every expenditure made by the federal government counts the same - as spending. That's not true of businesses. If a business makes an investment in new productive assets - in plants or equipment, for instance - that's not counted as an expenditure, it's counted as an asset on the firm's balance sheet that is depreciated over its useful life.

The federal government has no capital budget. Spending on new roads, or new government buildings that result in increased productivity in the economy are counted just the same as expenditures on pure consumption that satisfy our needs in the present. That artificially enlarges the "federal deficit" - and the "federal debt." We count all of the Government's debt, but we never count any of the government's assets in determining net government debt.

To have a real picture of the fiscal health of the Federal government, that has to change. Moreover, it has to change if there is to be a political incentive to spend more federal dollars on investment in future economic growth.

6). Stay on the offensive.
In dealing with the deficit issue, Progressives have to stay on the offensive. The Pete Peterson's of the world have geared up to use the new Presidential Fiscal Commission as a soapbox to promote their pro-Wall Street views that attempt to paint "greedy seniors" and out of control "entitlements" as the villains of the fiscal drama. We can't cede any ground on this issue.

In fact, the tiny plutocracy that sopped up most of our economic growth for the last decade and gambled recklessly on Wall Street are the true villains of the piece. They are the same people who insisted on the massive Bush tax cuts for the rich and a tax code where hedge fund managers who literally make hundreds of millions of dollars each year pay taxes at a lower rate than the janitors who sweep their floors.

And of course the real fiscal villains are the Bush era Neo-Cons who insisted that America spend a trillion dollars on the War in Iraq.

Austerity for seniors, cuts in education spending, reductions in spending on infrastructure - these are not long term solutions to America's fiscal woes. They will make matters worse.
In the fall elections, Democrats must tell seniors - which include the major universe of swing voters - the truth. If the Republicans take control of Congress they intend to implement Congressman Paul Ryan's plan to abolish Medicare and replace it with a voucher system
They will also do everything they can to privatize Social Security - which by the way will actually increase the size of the federal deficit.

To succeed this fall we have to demonstrate that Democrats are the party of average Americans - while the Republicans are the party of Wall Street and the big insurance companies.
We must make certain the voters understand that we are the party of growth, while the GOP is the party of fiscal recklessness that leads inevitability to austerity.

Progressive policies that lead to robust, widely-shared economic growth must be the goal of our fiscal policy - and that very growth is very much a part of the long-term solution to our fiscal problems.

Robert Creamer's recent book: Stand Up Straight: How Progressives Can Win, available on Amazon.com.

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