Tuesday, April 27, 2010 is a red letter day for the harbingers of debt disaster. That date marks the first meeting of the new National Commission on Fiscal Responsibility and Reform, a commission established by President Obama to outline cuts in government spending to reduce the national debt.
To kick off this campaign of slashing government spending, the Peter G. Peterson Foundation Â an organization that The Wall Street JournalÂs Gerald F. Seib calls Âthe nationÂs leading scold on deficit and debtÂ Â will hold a conference on Wednesday. Such luminaries as former President Clinton, current Budget Director Peter Orszag, the Commission chairmen, Allan Simpson and Erskine Bowles, and the fallen genie of prosperity, Alan Greenspan, will lecture the public on the dire consequences of government deficit spending and accumulated debt.
This is all part of a highly orchestrated campaign to convince any and all that government spending will be bring us all to doom. But notice that they donÂt have military spending, wars in the Middle East, aid to client states, or corporate welfare in their sights. And notice, too, that they have no intention of extracting more federal revenue from the rich or the corporate world.
What do they have in mind?
They will, with much feigned reluctance, attack ÂentitlementÂ programs and other social spending that collectively benefit the majority. They will explain that there is much ÂfatÂ and abuse in our most popular and needed programs like Social Security, Medicare, and Medicaid. We will be assured that these reductions will not affect service or availability. We will see warm, smiling faces in the media, proudly extolling the virtue of fiscal prudence to those living in deteriorating neighborhoods, lacking public services, and suffering a torn social net.
The Big Lie
The fear of deficit spending and government debt is, like so many other contrived panics fostered by the rich and powerful, a fantasy. There are no immediate or, necessarily, long term dire consequences to deficit spending or growing national debt, as economist Dean Baker has hammered away for years. By likening national deficits and debt to household budgets, pundits cynically create the fears that pave the way for the slash and burn policies embraced by both political parties. On the other hand, there are often compelling social reasons for increased deficit spending and larger debt accumulation – reducing unemployment, poverty, and poor health care and supporting education, infrastructure, housing, and other public services, for example.
Thanks to a graph conveniently supplied by The Wall Street Journal (4-27-10), we can expose the scare tactics employed by the prophets of doom. The graph maps the place and trajectory of the national debt as expressed by a percentage of the gross domestic product over seven decades with a projection up to 2020. Even a casual glance at the chart shows the explosion of debt incurred during the years of the Second World War, with an unprecedented peak in the mid-1940s, a peak never approached since then.
Pundits explain this simply as an unavoidable necessity brought on by the war effort. With the exception of a few serious students of The Great Depression, no one adds that this massive spending restored the US economy to some measure of vitality and promise. The New Deal took the edge off some of the pain and stabilized the collapse, but only the momentum of extreme deficit war-time spending kept the post-war period from a return to stagnation.
What some herald as the Âgolden eraÂ of US capitalism Â the 1950s Â was only possible because of the previous ÂprofligateÂ era of Âspending beyond our meansÂ. While The WSJ graph shows a decline in public debt throughout the 1950s, the level of national debt at the end of that decade remained comparable to the current level. Further debt reduction was only an issue for cranks on the right
Equally noteworthy, the period of the lowest deficit spending and national debt over the last seventy years Â the 1970s Â was a decade of ÂstagflationÂ: stagnant economic growth combined with high inflation, an unprecedented growth in the cost of living. Popular mythology blames the eraÂs inflation on the military spending of the Vietnam War, but the facts Â conveyed by the graph Â belie this interpretation.
The national debt Â as a percentage of GDP – actually declined during the Vietnam War years. Undoubtedly, some of the debt stability of the 1970s was due to inflation cheapening debt, but government spending decidedly did not fuel this period of ultra-high inflation. Ironically, all of the deficit hawks Â those predicting dire consequences from the expansion of national debt Â ominously predict, in our time, staggering inflation as a result of debt growth.
In the 1980s, President Reagan spent federal funds like a drunken sailor, primarily on the military and US aggression. The explosive growth of government spending pulled the economy out of the deep recession brought on by his Administration (with the help of previous President Carter and the shock therapy of his Federal Reserve chairman, Volker). This spending also paved the way for the extended growth of the 1990s.
While President ClintonÂs reign enjoyed the stimulative benefits of the Reagan era, he chose to balance the budget and reduce government debt in his second term, declaring an end to Âthe era of big government as we know itÂ. Like the proposals of the deficit hawks of this moment, the reduction in government spending came at the expense of the welfare system, government employment, and social programs. Arguably, this exercise in Âresponsibility and reformÂ contributed to the economic decline of this past decade.
To put matters bluntly, nothing in the distant history of the national debt suggests a necessary or direct connectionÂ between increasing deficit spending and price inflation or any other dire economic consequences. There is, however, the strong suggestion that deficit spending contributes to economic recovery.
On the other hand, there is a plausible correlation between economic crisis and a low or non-existent federal tax rate for the highest incomes. Conversely, the periods of high GDP growth rates and strong recovery coincide often with rising or high tax rates for the very rich. Prior to World War I taxes on the wealthy were non-existent or low and were raised dramatically in 1917, leading into the post war boom. They dropped equally dramatically a few years before the collapse of 1929.
As New Deal programs stabilized the economy, they climbed to unprecedented levels, remaining high until the Reagan Administration. Taxes on the rich have tumbled since 1982 with only a modest bump up during the Clinton years. This sharp decline Â like the decline before the Great Depression Â led into the multiple economic crises of the twenty-first century, culminating in the current economic chaos.Â I think that there is little chance that President ObamaÂs blue ribbon commission will explore this trend.
One might well draw interesting lessons from studying the historic relationship between employment, standards of living, the poverty rate, health benchmarks, and other measures of human progress and the level of deficit spending. Certainly these yardsticks are more important to the vast majority of people than the stale, academic measure of debt against gross domestic product that obsesses bond markets, the derivative profiteers, and the other speculators who have brought the economy to its knees.
Now our political nobles want to sell us on the idea that we have a stake in reducing the national debt by allowing them to gut popular and essential social services and programs.
I donÂt think our comrades in Greece and other countries facing these draconian cuts are buying this. And I donÂt think we should either.
April 28, 2010