The War on Deficit Spending “TWODS” – Part 1, Introduction

We are all being “spun” -- again.

The American PR machine is again in full throated roar.  This time the "War" is on “Deficit Spending”.  The war is being waged by forces which are probably unbeatable.

The techniques which worked so well in the lead up to the 2003 Iraq war are now being used again.  The con men and the financiers are the same.  The target as always, is the American voter.

Privatizing Social Security, and privatizing the delivery of medical care are TWODS goals.  The misdirection, the threatened dangers and the bogeymen are the imaginary perils of “Deficit Spending”.




Acquiring Iraqi oil and the dismembering of Iraq were the goals in Iraq.  The misdirection, the threatened dangers and the bogeymen were the imagined horrors of Sadaam’s non existent WMD’s, and his non existent ties to "Al Qaeda". 

The "Sadaam has WMDs and is allied with Al Qaeda " campaign was brilliantly successful.  The Senate voted for war by a majority of more than 3:1, and the  House voted for the war by more than 2:1.  Nearly half a decade after President Bush's "Mission Accomplished" speech, half of the American people still believed that  Sadaam had WMDs in 2003.

Below is an extract from a WaPo piece datelined Aug 7 2007

-- Do you believe in Iraqi "WMD"? Did Saddam Hussein's government have weapons of mass destruction in 2003?
Half of America apparently still thinks so, a new poll finds, and experts see a raft of reasons why: a drumbeat of voices from talk radio to die-hard bloggers to the Oval Office, a surprise headline here or there, a rallying around a partisan flag, and a growing need for people, in their own minds, to justify the war in Iraq.
People tend to become "independent of reality" in these circumstances, says opinion analyst Steven Kull.
The reality in this case is that after a 16-month, $900-million-plus investigation, the U.S. weapons hunters known as the Iraq Survey Group declared that Iraq had dismantled its chemical, biological and nuclear arms programs in 1991 under U.N. oversight. That finding in 2004 reaffirmed the work of U.N. inspectors who in 2002-03 found no trace of banned arsenals in Iraq.
Despite this, a Harris Poll released July 21 found that a full 50 percent of U.S. respondents _ up from 36 percent last year _ said they believe Iraq did have the forbidden arms when U.S. troops invaded in March 2003, an attack whose stated purpose was elimination of supposed WMD. Other polls also have found an enduring American faith in the WMD story.

I have every reason to believe that the TWODS campaign will be even more successful.  The subject is more complex, and words like "deficit" and "spending" have an unhealthy ring.  More important:  The banking industry was not actively pushing the Iraq war.

Nevertheless, it is possible to develop a factual, near watertight case for the amorphous thing called "deficit spending", and dammit I intend to make it.  I will be again "pissing into the wind".

This  post is Part 1 of, and the introduction to, a multi part series of posts I intend to publish on American "deficit spending", borrowing, debt, bank bailouts, “the stimulus”,  government budgets and allied subjects.

Future posts will be chart and data rich.  I hope to present arithmetically, scientifically and historically consistent arguments for "deficits".  I think I can present fundamental economic truths without using arcane economics jargon.  Along the way I plan to demonstrate the cynicism and lies of the "deficit spending is bad" political crowd.
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Onwards!

A persistent drum beat for “Deficit Reduction” began in the waning months of 2009 as it became probable that:

1. The $4,500 billion or so disbursed into the “FIRE” (Finance, Insurance, Real Estate) sector by the Fed and the Treasury would resurrect the sector and the Obama administration would not make any radical changes to its structure.  TBTF banks, for instance, would survive with management intact.  No major criminal charges would be brought against bankers who had brought the world to the edge of catastrophe.
   
2. The “stimulus” package of about $780 billion (ARRA, February 2009) was almost certainly insufficient to prop up “Main Street”.  Early in 2010 the federal government would almost certainly need to inject more fiscal stimulus to reduce unemployment
   
3. The Fed had taken unprecedented actions to save the FIRE sector, and would continue to do whatever was necessary to preserve it in its current form.  Interest rates would be kept near zero, bad debts would be moved off TBTF bank balance sheets and more “Quantitave Easing” would be available when necessary.  "Moral Hazard" demonstrated to the nth degree.
   
4. The military budget was safe.  The Obama administration showed no interest in reducing military budgets, changing long term military strategies, and no interest in waging immediate wars. 
   

The Obama administration’s February 2010 economic forecasts about unemployment and the growth of the economy were clearly too rosy.  That and the clear lack of a rapid improvement in the real economy, now a year and a half into Obama’s first term, have given Republicans and their allies a near perfect opening to attack the $780 billion stimulus package.

The four "probability" points enumerated above have now become a near certainty.

In the TWOD campaign spin of lies and half truths:

The stimulus was another money wasting, deficit increasing program dreamed up by soft hearted liberals and left wing academics.  Everyone knew it would fail and it did.  Unemployment is worse now than it was in 2009.  It was money down the drain.  Every one knows that governments cannot do anything right.  NO MORE DEFICIT SPENDING.  We cannot keep throwing good money after bad.  If we hadn't messed with the free market we would be on the way to solving this problem.  Giving money to the unemployed only reduces their desire to work.  Unemployment aid creates more unemployment.   Solving a debt problem by taking on more debt makes things worse.  NO MORE DEFICIT SPENDING.  NO MORE DEFICIT SPENDING.

While reducing deficit spending is the avowed target, TWOD’s ultimate goal is the reduction and privatization of Social Security, Medicare, and Medicaid.  Eliminating if politically possible, or controlling the funds if not, of these social engineering, income redistributing programs, has been the holy grail of the FIRE sector since the inception of these programs.

Why did the oligarchy pick “Reducing Deficit Spending” as a hook on which to hang a revenue stream grabbing campaign?  Because it plays into many carefully developed stereotypes, and fits the needs of many constituencies:

1. Deficits sound bad.  Most voters do not know what “deficit spending” means, and will not take the time to find out.  Deficits sound scary and somewhat evil.  Deficits Bad.  Reducing deficits good.  Austerity good.
   
2. Like Sadaam Hussein, Iraqi WMD’s, Islamic terrorism, illegal immigrants and other bogey men, deficit spending is a simple concept, easily demonized.
   
3. Reducing unemployment payments to reduce deficit spending, is a simple demagogic maneuver.  Reduced unemployment payments creates angry voters who will most likely turn on incumbent Democrats and hand Congress to Republicans.
   
4. Deficit spending is a “government thing”, and since Ronald Reagan, “everyone knows ” the government is the problem and not the solution”.
   
5. “Everyone knows Democrats and Liberals are good at giving OTP money to the poor, but they can’t balance a budget”
   
6. “The stimulus increased the deficit and did nothing”.
   
7. Arguments for reducing deficit spending by reducing and privatizing social welfare payments plays directly into the hands of Wall Street who have been salivating to handle Social Security money since the inception of Social Security
   
8. The “Reducing the deficit by reducing taxes and thus increasing economic growth” shibboleth is still believed by a very large number of middle class voters.  This “trickle down” Reagan era mantra benefits corporations and wealthy individuals
   
9. Reducing the deficit by reducing social welfare payments reduces the economic pressure on defense contractors and the Pentagon

How successful is the campaign to date?  Very.  Here is a sense of the thinking in Washington reported in The Wapo on July 12 2010.  The quote is from Simpson and Bowles, the leaders of the National Commission on Deficit Reduction:

Obama's debt commission warns of fiscal 'cancer'

The commission leaders said that, at present, federal revenue is fully consumed by three programs: Social Security, Medicare and Medicaid. "The rest of the federal government, including fighting two wars, homeland security, education, art, culture, you name it, veterans -- the whole rest of the discretionary budget is being financed by China and other countries," Simpson said. [...]

Bowles pointed to steps taken recently by the new coalition government in Britain, which also faces an acute budgetary problem, as a guide to what the commission might use in its recommendations. That would mean about three-quarters of the deficit reduction would be accomplished through spending cuts, and the remainder with additional revenue.

And you can bet there will be no short term reductions in military spending recommended.

I will end this post with a main stream economists voice for my position on "deficit reduction".  Professor JK (Jamie) Galbraith, son of the "real" JK Galbraith is very much a main stream economist.  Below is an extract from his testimony at the Deficit Commission hearing – the same commission chaired by Simpson and Bowles mentioned above.  For those of you who have the time, I urge you to read the whole testimony – it’s not very long, but does have a little economic jargon.. Statement to the Commission on Deficit Reduction by Professor John Kenneth Galbraith, UT Austin on June 20 2010

Statement to the Commission on Deficit Reduction by James K. Galbraith, Lloyd M. Bentsen, jr. Chair in Government/Business Relations, Lyndon B. Johnson School of Public Affairs, The University of Texas at Austin, and Vice President, Americans for Democratic Action. June 30, 2010.

...

1. Clouds Over the Work of the Commission. Your proceedings are clouded by illegitimacy. In this respect, there are four major issues. 

First, most of your meetings are secret, apart from two open sessions before this one, which were plainly for show. There is no justification for secret meetings on deficit reduction. No secrets of any kind are involved. Nothing you say will affect financial markets. Congress long ago — in 1975 — reformed its procedures to hold far more sensitive and complicated meetings, notably legislative markups, in the broad light of day. Secrecy breeds suspicion: first, that your discussions are at a level of discourse so low that you feel it would be embarrassing to disclose them. Second, that some members of the commission are proceeding from fixed, predetermined agendas. Third, that the purpose of the secrecy is to defer public discussion of cuts in Social Security and Medicare until after the 2010 elections. You could easily dispel these suspicions by publishing video transcripts of all of your meetings on the Internet, and by holding all future meetings in public. Please do so.

Second, there is a question of leadership. A bipartisan commission should approach its task in a judicious, open-minded and dispassionate way. For this, the attitude and temperament of the leadership are critical. I first met Senator Simpson when we were both on Capitol Hill; at Harvard he became friends with my late parents. He is admirably frank in his views. But Senator Simpson has plainly shown that he lacks the temperament to do a fair and impartial job on this commission. This is very clear from the abusive response he made recently to Alex Lawson of Social Security Works, who was asking important questions about the substance of the commission’s work, as well as calling attention to the illegitimate secrecy under which you are operating.

....

Conflicts of interest constitute the fourth major problem. The fact that the Commission has accepted support from Peter G. Peterson, a man who has for decades conducted a relentless campaign to cut Social Security and Medicare, raises the most serious questions. Quite apart from the merits of Mr. Peterson’s arguments, this act must be condemned. A Commission serving public purpose cannot accept funds or other help from a private party with a strong interest in the outcome of that Commission’s work.  Your having done so is a disgrace.

...

2. Current Deficits and Rising Debt were Caused by the Financial Crisis. Overwhelmingly, the present deficits are caused by the financial crisis. The financial crisis, the fall in asset (especially housing) values, and withdrawal of bank lending to business and households has meant a sharp decline in economic activity, and therefore a sharp decrease in tax revenues and an increase in automatic payments for unemployment insurance and the like. According to a new IMF staff analysis, fully half of the large increase in budget deficits in major economies around the world is due to collapsing tax revenues, and a further large share to low (often negative) growth in relation to interest payments on existing debt. Less than ten percent is due to increased discretionary public expenditure, as in stimulus packages. This point is important because it shows that the claim that deficits have resulted from “overspending” is false, both in the United States and abroad.

….

5. The Only Way to Reduce Public Deficits is to Restore Private Credit. The conclusion to draw from the above argument is that large deficits going forward are likely to have the same source as they do right now: stubbornly high unemployment. The only way to reduce a deficit caused by unemployment is to reduce unemployment by private financing, which is to say by bank credit, if the public deficit is going to be reduced. This is a fact of accounting. It is not a matter of theory or ideology; it is merely a fact. The only way to grow out of our deficit is to cure the financial crisis. To cure the financial crisis would require two comprehensive measures. The first is debt restructuring for the entire household sector, to restore private borrowing power. The second is a reconstruction of the banking system, effectively purging the toxic assets from bank balance sheets and also reforming the bank personnel and compensation and other practices that produced the financial crisis in the first place. To repeat: this is the only way to generate deficit-reducing, privately-funded growth and employment.

...

We can conclude that there is actually no economic justification for the target of reducing the primary deficit to zero by 2015 or any other date. The right economic objectives are to meet real problems, not those conjured from thin air by economists. Bringing about a rapid end to unemployment, caring properly for an aging population, cleaning up the Gulf of Mexico, coping with our energy insecurity and with climate change are all far more important objectives than reducing a projection of future budget deficits.

My summary of Galbraith’s testimony is:

1. The economic forecasts you are using are junk
   
2. The current recession and unemployment was caused by a financial crisis, not by excessive government spending
   
3. The deficit can only be reduced by reducing unemployment
   
4. Reducing unemployment in the long term will require reviving private credit.  Reviving private credit will require debt restructuring and radical reform of the current financial system.
   
5. We should be targeting solving real world problems, not the future deficit projections based on flawed economics and junk models.

  I agree with every one of Galbraith's points.  If  he includes reducing income and wealth inequity as a necessity for long term economic health, I have nothing to add to his five points I have summarized above.