RebelCapitalist: Financial Information for the Rest of Us | Deficit Hysteria: Oligarchy Gone Wild

Deficit Hysteria: Oligarchy Gone Wild

May 26, 2010 | By: Mr_Blue | Tags: deficit hawks, budget deficit, deficit

Most people understand that jobs should be the No. 1 priority right now and that should be the focus of government policy. But the oligarchy/deficit hawks are going wild with deficit hysteria. There is a reason for this.

Harry Meyerson had a very good story this morning in the Washington Post: Deficit hawks ignore the R-word. Interesting coming from the Washington Post since it has been instigating this deficit hysteria. Maybe they thought needed to balance this out? This is what Meyerson asked:

How else to explain the continual harping on the deficit by editorialists, centrist think tanks and the like when the nation is still enmeshed in the most serious economic downturn since the 1930s? How else to understand the growing opposition to the jobs bills Congress is set to vote on this week, particularly when nobody has identified any future engine of American economic growth save countercyclical public investment?

He then cites two polls showing that WE get it:

It’s not that the American people aren’t concerned about the deficit. But in poll after poll, they make clear that their No. 1 concern is jobs. Forty-seven percent of respondents to a Fox News poll this month, for instance, said they were concerned with the economy and jobs, while just 15 percent acknowledged concern over the deficit and spending. Eighty-one percent of respondents to a Pew Research Center poll from this month thought it “very important” for Congress to address the jobs situation—more than for any other topic. “There is no significant difference across party lines,” Pew reported.

But, Meyerson gets bogged down talking about short-term deficits vs. financial sustainability when responding to deficit hawks call to cut spending now - he is partially correct:

The problem with this ostensible solution is twofold. First, it conflates short-term deficits needed to stanch the recession with long-term issues of fiscal sustainability. Such thinking risks turning a short-term recession into long-term stagnation, much as Japan did in the 1990s by failing to stimulate its economy sufficiently. Second, it calculates the dollar cost of the stimulus but neglects to factor in the dollar benefit from, for instance, keeping hundreds of thousands of teachers, police and firefighters on the job and paying taxes rather than collecting unemployment insurance. Once such particulars are accounted for, a new study from the liberal Economic Policy Institute argues, the cost of the jobs created in the bill coming before the House this week is more than halved, from $75 billion to $35 billion.

He is correct in that there will be long-term negative effects if the government doesn’t sufficiently stimulate the economy. The first stimulus from 2009 was not enough and that is why President Obama and Democrats are pushing for more (they were warned it wouldn’t be enough). The other thing that is absolutely correct and is often ignored by deficit hawks are the benefits of keeping people employed and high costs of unemployment. It’s just lost income - it’s other societal ills such as poverty, families breaking up and crime. It’s almost like deficit hawks/oligarchy don’t care.

Meyerson is incorrect about short-term deficits vs. financial sustainability. The problem that people often overlook and deficit hawks totally ignore is the other side of the equation to a budget deficit - tax revenue. Tax revenue increase during a good economy. In fact, budget deficits are very cyclical - they increase in bad times and decrease in good times. So, if deficit hawks/oligarchy are so concerned about the deficit they should be pushing for more job stimulus. But no. Why?

Fiscal policy - tax policy and spending policy - can redistribute income. Fiscal policy for that past eight years has redirected income upwards - not just tax policy but how government spends as well - for instance privatization of social services and war. What they fear is a Democratic administration and a Democratically controlled congress changing the status quo. Democrats have been gnawing at the edges with changes in tax code. They are too scared to go further because they don’t understand economics. But the deficit hawks/oligarchy understand economics and the redistribution effects of fiscal policy.

Deficit hawks/oligarchy are attacking programs such as medicare and social security because these programs are effective with their missions and are the last bastions of redistribution of income to people who need it the most. The deficit hawks/oligarchy hate that and are out to destroy both programs so that they can benefit from the privatization of both. This the game that is being played. We need to understand very soon.

I leave you with an equation that I will explain later. It is an accounting identity in economics that the deficit hawks/oligarchy don’t want you to understand: