Reports from the Economic Front

The conventional wisdom seems to be that our biggest economic challenge is runaway government spending. The reality is that government spending is contracting and pulling economic growth down with it.  And worse is yet to come.

Perhaps the best measure of active government intervention in the economy is something called “government consumption expenditure and gross investment.”  It includes total spending by all levels of government (federal, state, and local) on all activities except transfer payments (such as unemployment benefits, social security, and Medicare).  

The chart below shows the yearly percentage change in real government consumption expenditure and gross investment over the period 2000 to 2012 (first quarter).  As you can see, while the rate of growth in real spending began declining after the end of the recession, it took a nose dive beginning in 2011 and turned negative, which means that government spending (adjusted for inflation) is actually contracting.

The following chart, which shows the ratio of government consumption expenditure and gross investment to GDP, highlights the fact that government spending is also falling as a share of GDP.

Adding transfer payments, which have indeed grown substantially because of the weak economy, does little to change the picture.  As the chart below shows, total government spending in current dollars, which means unadjusted for inflation, has stopped growing.  If we take inflation into account, there can be no doubt that total real government spending, including spending on transfer payments, is also contracting. 

The same is true for the federal government, everyone’s favorite villain.  As the next chart shows, total federal spending, unadjusted for inflation, has also stopped growing.

Not surprisingly, this decline in government spending is having an effect on GDP. Real GDP in the 4^th Quarter of 2011 grew at an estimated 3 percent annual rate.  The advanced estimate for 1^st Quarter 2012 GDP growth was 2.2 percent.  A just released second estimate for this same quarter revised that figure down to 1.9 percent.  In other words, our economy is rapidly slowing.

What caused the downward revision?  The answer says Ed Dolan is the ever deepening contraction in government spending:   

What is driving the apparent slowdown? It would be comforting to be able to blame a faltering world economy and a strengthening dollar, but judging by the GDP numbers that does not seem to be the case. The following table (see below) shows the contributions of each sector to real GDP growth according to the advance and second estimates from the Bureau of Economic Analysis. Exports, which we would expect to show the effects of a slowing world economy, held up well in the first quarter. In fact, the second estimate showed them even stronger than did the advance estimate. The contribution of private investment also increased from the advance to the second estimate, although not by as much. Exports and investment, then, turn out to be the relatively good news, not the bad, in the latest GDP report.

Instead, the largest share of the decrease in estimated real GDP growth came from an accelerated shrinkage of the government sector. The negative .78 percentage point decrease of the government sector is the main indicator that we are already on the downward slope toward the fiscal cliff.

If current trends aren’t bad enough, we are rapidly approaching, as Ed Dolan noted, the “fiscal cliff.” That is what I was referring to above when I said that worse is yet to come. As Bloomberg Businessweek explains:  

Last summer, as part of its agreement to end the debt-ceiling debate (debacle?), Congress strapped a bomb to the economy and set the timer for January 2013. Into it they packed billions of dollars of mandatory discretionary spending cuts, timed to go off at exactly the same time a number of tax cuts [for example, the Bush tax cuts and the Obama payroll-tax holiday] were set to expire  

The congressional deficit supercommittee had a chance to disarm the bomb last fall, but of course it didn’t. And so the timer has kept ticking. The resulting double-whammy explosion of spending cuts and tax increases will likely send the economy careening off a $600 billion “fiscal cliff.”

The fiscal contraction will actually be even worse, since the extended unemployment benefits program is also scheduled to expire at the end of the year.  

So, what does all of this mean?  According to Bloomberg Businessweek:

If Congress does nothing, the U.S. will almost certainly go into recession early next year, as the combo of spending cuts and tax hikes will wipe out nearly 4 percentage points of economic growth in the first half of 2013, according to research by Goldman’s Alec Phillips, a political analyst and economist. Since most estimates project the economy will grow only about 3 percent next year, that puts the U.S. solidly in the red.

We seem to have a way of regularizing the pain felt by working people—worsening living conditions become little more than background noise to business as usual. 

The situation for the unemployed is a case in point.  We have a complex, but comparatively miserly, unemployment compensation system. 

Workers are generally entitled to 26 weeks of unemployment benefits.  However, there are two programs that potentially extend the benefit period for the unemployed. The first is the Emergency Unemployment Compensation (EUC) program, which was enacted in 2008 in response to the economic crisis.  As the table below shows, the EUC offers workers in states with high rates of unemployment up to 53 additional weeks of benefits. 

Workers who exhaust both their regular unemployment insurance and EUC benefits can receive additional support through the second program, the permanent federal-state Extended Benefits (EB) program.  As the table above shows, that program offers a maximum of 20 extra weeks of benefits depending on state unemployment rate levels.  However, there is an additional provision to the EB program that is now coming into play with negative consequences.  

As Hanna Shaw, of the Center on Budget and Policy Priorities, explains: 

A state may offer additional weeks of UI benefits through EB if its unemployment rate reaches certain thresholds . . . and if this rate is at least 10 percent higher than it was in any of the three prior years.  But unemployment rates have remained so elevated for so long that most states no longer meet this latter criterion (referred to as the “three-year lookback”). 

Because of this lookback provision hundreds of thousands of unemployed workers are now losing benefits, not because conditions are improving but because they are not continuing to worsen. The table below highlights the 25 states that have been forced to stop providing EB benefits this year and the number of workers in each state that have been cut adrift as a result.  Look at California–more than 95,000 workers have lost their benefits so far this year despite the fact that the state unemployment rate is almost 11 percent.

This is no accidental outcome.  In fact, according to Shaw,

Policymakers could have addressed the “lookback” when they extended federal UI at the beginning of the year, but they didn’t.  Instead, Congress not only allowed EB payments to fade out, but it also made changes that over the course of the year will reduce the number of weeks of benefits available in the temporary Emergency Unemployment Compensation (EUC) program, which provides up to 53 additional weeks to the long-term unemployed based on the unemployment rate in their state.

How serious is the long term unemployment problem?  Check out the chart below.  As it shows, the share of the labor force that is unemployed for more than 26 weeks is higher than at any point in the last six decades.  Perhaps even more striking is the fact that 41.3 percent of the 12.5 million people who were unemployed in April 2012 had been looking for work for 27 weeks or longer.

In terms of the master narrative, this is just another of the necessary adjustments required to stabilize the “system;” no need for alarm.  Makes you wonder about the aims of the system, doesn’t it?

It is no secret that our public sector is in trouble.  Our roads and bridges desperately need upgrading.  Our schools and libraries are being forced to slash staff and activities.  Our social services and program are being cut.  And the reason: not enough money.  

Yet at the same time, it is also no secret that our most powerful and profitable corporations are merrily finding countless ways to avoid paying taxes.  It might seem like this situation would produce a serious discussion about societal aims and values—but it hasn’t.  Our political and business leaders appear quite content that business as usual should not be inconvenienced for the sake of the economy.

The New York Times recently provided an excellent study of, in its words, “How Apple Sidesteps Billions in Taxes.”  How does the company do it?  The answer is tax loopholes and a number of subsidiaries in low tax places like Ireland, the Netherlands, Luxembourg and the British Virgin Islands.  Why does it do it?  We are talking real money here.  According to the New York Times, Apple “paid cash taxes of $3.3 billion around the world on its reported profits of $34.2 billion last year, a tax rate of 9.8 percent.”  By comparison, Wal-Mart was downright patriotic—paying a tax rate of 24 percent.

Foreign Travel

Get your passports ready.  If a U.S. consumer buys an Apple product like a song from iTunes or an iPhone the royalties earned are routed to an Irish subsidiary.  That is because Apple assigned the rights to royalties on patents developed in its California operations to the subsidiary.  The royalities gathered in Ireland are then transferred, with few tax obligations thanks to Irish law, to another Apple subsidiary in the British Virgin Islands, where tax rates are extremely low.  Thus, not only does the U.S. lose out on tax revenue, so does Ireland.  And in case you have forgotten, Ireland is suffering massive cuts in public spending because of a lack of revenue.

If a product is purchased by someone residing outside the U.S., the patent royalties are routed to a different Irish subsidiary.  Apple then transfers those royalties through the Netherlands, tax free thanks to European laws, back to its primary Irish subsidiary and then on to its Caribbean subsidiary.  

If this is confusing check out this graphic.  How important is Ireland to Apple? In 2004, the country received more than one-third of Apple’s world wide revenue.  The U.S. corporate tax rate is 35 percent.  The Irish corporate tax rate is 12.5 percent.  And the British Virgin Island tax rate is even lower.  

Of course Apple’s profits are not limited to patent royalties.  That is where its Luxembourg subsidiary comes into play.  As the New York Times explains:

 when customers across Europe, Africa or the Middle East — and potentially elsewhere — download a song, television show or app, the sale is recorded in this small country . . . In 2011 [the revenue of this Luxembourg subsidiary] exceeded $1 billion, according to an Apple executive, representing roughly 20 percent of iTunes’s worldwide sales.

The advantages of Luxembourg are simple, say Apple executives. The country has promised to tax the payments collected by Apple and numerous other tech corporations at low rates if they route transactions through Luxembourg. Taxes that would have otherwise gone to the governments of Britain, France, the United States and dozens of other nations go to Luxembourg instead, at discounted rates.

“We set up in Luxembourg because of the favorable taxes,” said Robert Hatta, who helped oversee Apple’s iTunes retail marketing and sales for European markets until 2007. “Downloads are different from tractors or steel because there’s nothing you can touch, so it doesn’t matter if your computer is in France or England. If you’re buying from Luxembourg, it’s a relationship with Luxembourg.”  

Back Home In The U.S. 

Of course Apple also makes money from sales in the United States.  But it has a way of handling that “problem” as well.  The company’s headquarters is in Cupertino, California but it has a Reno subsidiary, Braeburn Capital, collect and manage its profits.  According to the New York Times:

When someone in the United States buys an iPhone, iPad or other Apple product, a portion of the profits from that sale is often deposited into accounts controlled by Braeburn, and then invested in stocks, bonds or other financial instruments, say company executives. Then, when those investments turn a profit, some of it is shielded from tax authorities in California by virtue of Braeburn’s Nevada address.

Since founding Braeburn, Apple has earned more than $2.5 billion in interest and dividend income on its cash reserves and investments around the globe. If Braeburn were located in Cupertino, where Apple’s top executives work, a portion of the domestic income would be taxed at California’s 8.84 percent corporate income tax rate.

But in Nevada there is no state corporate income tax and no capital gains tax. What’s more, Braeburn allows Apple to lower its taxes in other states — including Florida, New Jersey and New Mexico — because many of those jurisdictions use formulas that reduce what is owed when a company’s financial management occurs elsewhere.

California has lost billions of dollars in tax revenue—oh yes and is deep in a budget crisis.  

In fairness to Apple it is far from alone in using these tricks of the trade.  Almost all technology companies do it.  So, here is the thing—if we really care about our public infrastructure and programs we have to start getting tough on these companies.  Their success was aided by past public investment–there should be payback.   But then again perhaps there is no such thing as society–only the corporation counts.   

Whenever people propose increasing taxes on the wealthy to maintain our needed public programs and services it doesn’t take long for someone to raise the following objection: if we do that, the rich will flee, thereby weakening rather than strengthening our (fill in the blank: city, state, or national) economy.

How seriously should we take this threat?  Opponents of Oregon Measures 66 and 67, which raised taxes on the wealthy and corporations and were approved by voters in 2010, cited just this danger in campaigning against them. Among those business leaders most upset with the outcome were some of Oregon’s most well known corporate leaders, for example Phil Knight (Nike) and Tim Boyle (Columbia Sportswear).  Knight gave some $100,000 to the anti-Measures campaign, Boyle approximately $75,000.

 Here is what Knight had to say about Measures 66 and 67 in an article he wrote for the Oregonian newspaper: 

Measures 66 and 67 should be labeled Oregon’s Assisted Suicide Law II.

They will allow us to watch a state slowly killing itself.

They are anti-business, anti-success, anti-inspirational, anti-humanitarian, and most ironically, in the long run, they will deprive the state of tax revenue, not increase it.

The current state tax codes are all of those things as well. Measures 66 and 67 just take it up and over the top. . . .

Reputable economists forecast 66 and 67 will cost the state thousands — maybe tens of thousands — of jobs, and that thousands of our most successful residents will leave the state. 

Well, despite the threats, there is no evidence that the wealthy or jobs fled the state to escape the tax increases.  Rather the state got some desperately needed revenue.

 Here is another data point, courtesy of the Wall Street Journal, that also suggests we should take this threat of flight with a grain of salt:  

According to a new study from Lloyds TSB, nearly one in five affluent Britons plan to leave the country in the next two years. That’s up from 14% a year ago. The study measured those with around $400,000 in investible assets.

Conservatives point out this sudden flight comes on the back of the 50% tax rate that was imposed on top earners during the recession. That hike was widely blamed for U.K. wealth flight and for not raising nearly as much revenue as expected.

But a closer look at the study provides a different picture. The top reason that the study group (it’s a stretch to call them “wealthy”) gave for leaving were crime and “anti-social behavior.” About the same number, however, cited the British weather as the top reason for leaving.

The study really gets interesting when you look at where these affluent folks want to go to. The top destination is high-tax France, where the leading Presidential contender is pushing a 75% tax rate on the wealthy.  The second choice is Spain, followed by the U.S., Australia and New Zealand.

When asked what would make the U.K. a better place to live, most cited infrastructure spending. That was followed by “cutting red tape for business.” Cutting taxes got about the same number of votes as “improving public services like healthcare, education and the police.”

 In other words, the affluent want more government services not less. And taxes were a relatively minor concern in their decision to move. 

Returning to the U.S., it is important to remember that the rich have not only succeeded in capturing an ever greater share of national income, they have also enjoyed steady and disproportionately large cuts in their tax rates (see below). This trend was the result of deliberate policy, which was defended by claims that lower tax rates on the wealthy would deliver robust investment and job creation. It clearly has not worked out that way; in fact quite the opposite has taken place.  This seems a very opportune time to reverse the trend.

While the press cheers on every sign of private sector job creation, little attention is being paid to public sector job destruction.  As the Economic Policy Institute reports, while there has been an increase of some 2.8 million private sector jobs since June 2009, public sector employment (federal, state, and local governments combined) has actually fallen by approximately 600,000.  This is a very unusual development as the figure below reveals.

According to the Economic Policy Institute, if the percentage growth of public sector employment in this recovery had followed past recovery trends, we would have an additional 1.2 million public sector jobs and some 500,000 additional private sector jobs. A separate reason for concern about this trend is that lost public sector jobs generally means a decline in the services that we need to sustain our communities.  The withering away of our public sector during a period of expansion should worry us all.

Representative Paul Ryan (Wisconsin), the chairman of the House Budget Committee, recently put forward his party’s budget plan.  Dean Baker reports on the Washington Post story which says of the plan that it “calls for spending cuts and tax changes that would put the nation on course to wipe out deficits and balance the budget by 2040.”  He notes that unfortunately the Post forgot to mention that the plan also largely does away with the government.  

The following table comes from the Congressional Budget Office analysis of the Ryan budget plan.  

In 2011, spending on “health care” came to 5 percent of GDP, spending on “social security” equaled 4.75 percent of GDP, and spending on “other mandatory and defense and nondefense discretionary spending” totaled 12.5 percent of GDP.  Congressional Budget Office estimates are that by 2040, the Ryan plan will have reduced spending on “other mandatory and defense and nondefense discretionary spending” to 4.75 percent of GDP.  By 2050, that category will be down to 3.75 percent of GDP. 

Here is a short (less than 4 minute) video that illustrates the fact that 53% of our tax dollars, conservatively estimated, go to finance our military.   

[youtube] http://www.youtube.com/watch?v=kFeduoDWKj4 [/youtube]

And here is a link to a recent study by Robert Pollin and Heidi Garrett-Peltier on the employment effects of military spending versus alternative domestic spending priorities, in particular investments in clean energy, health care, and education.

The authors first examine the employment effects of spending $1 billion on the military versus spending the same amount on clean energy, health care, education or tax cuts.  The chart below shows their results. 

Moreover, even though jobs in the military provide the highest levels of compensation, the authors still find that “investments in clean energy, health care and education create a much larger number of jobs across all pay ranges, including mid-range jobs (paying between $32,000 and $64,000) and high paying jobs (paying over $64,000).”

Let’s see if these facts come up in the next Congressional budget debate.

Good old Ireland—according to the leaders of France and Germany, things would be a lot better in Europe if all the countries were like Ireland.  Their reason: the Irish have generally accepted their austerity “medicine” quietly while workers in other countries (like Greece and Spain) have been in the streets protesting.

The problem with being the “good” country is that while austerity helps ensure that the Irish government is able to make payments to the country’s international investors (especially French and German banks), the Irish people are suffering and their economy is close to sinking back into a new recession.  Some deal.

Not so long ago Ireland was known as the Celtic Tiger.  Ireland’s recent economic rise, which began in the 1990s, was fueled by multinational corporate investment, much of it from US high-tech firms.  As Andy Storey explains:

Ireland, accounting for a mere 1% of Europe’s population, managed to attract 25% of all US greenfield investment into the EU in the early 1990s. US investment in Ireland, at $165 billion, is greater than US investment in Brazil, Russia, India and China combined. Multinationals, the majority of them from the US, account for 70% of Irish exports.

The attraction: Ireland’s extremely low tax rates and tariff-free access to the EU.

Unfortunately for Ireland, the 2001 collapse of the US high-tech bubble meant the end of US investment in the country.  Ireland was “saved,” however, by a debt-driven housing boom. Sound familiar? 

Irish banks were able to borrow cheaply thanks to the country’s 1999 adoption of the Euro.  And with manufacturing in a slump, they aggressively and profitably pushed loans to Irish home buyers and builders.  Storey highlights the importance of real estate activity to the Irish economy as follows:  

Investment in buildings accounted for 5% of output in 1995 but for over 14% in 2008. By 2006/07, the construction industry was contributing 24% to Irish income (compared to the Western European average of 12%), accounting (directly and indirectly) for 19% of employment (including high levels of migrant labor) and for 18% of tax revenues (property transaction taxes have now collapsed as construction activity has nosedived).  

Just like in the United States, this housing boom temporarily masked the fact that the country’s industrial base and public infrastructure was decaying, overall job growth was slowing, and household debt was soaring.  When the global crisis hit in 2008, triggered by the collapse of the US housing market, it was the end for Irish growth as well.  Irish banks lost access to foreign credit at the same time as their own real estate loans went bad.  The Irish financial sector was on the ropes and unable to repay its creditors.

So, what did the Irish government do?  In September 2008 it announced that it would guarantee all deposits and payments to foreign creditors.  Thus, the people of Ireland found themselves taking on all the debts of the Irish financial sector.  Not surprisingly, government debt as a share of GDP greatly increased.  

The main beneficiaries of this policy were the country’s foreign lenders, including French and German banks.  No wonder the French and German governments view Ireland as a good nation and role model for Europe.  This history challenges the notion, widely pushed by the leaders of France and Germany, that the region’s crisis was caused by out-of-control government spending.  

Of course, with low tax rates and an economy in recession the Irish government was in no position to pay the private debts it had taken over.  The answer, supported by European elites, was austerity.  The Irish government slashed spending on public sector projects and workers as well as social programs to free up funds.  But even that was not enough.  The Irish government had to borrow as well, an action that further increased the country’s national debt.   

The foreign creditors got paid, all right.  But the austerity only made things worse for Ireland.  The cuts drove the economy deeper into recession, again driving down revenue, and forcing the government to seek new loans.  However, foreign lenders could see the handwriting on the wall and were unwilling to substantially increase their lending to Ireland.  Instead of renouncing or renegotiating the debts, the Irish government went to the IMF and EU for help.  It was ”rewarded” with a major loan of approximately $90 billion in December 2010, at the cost of yet more austerity involving higher sales taxes and sharply reduced spending on social programs. 

And the consequences of this strategy for the Irish people?  As the New York Times reports:   

“This is still an insolvent economy,” said Constantin Gurdgiev, an economist and lecturer at Trinity College in Dublin. “Just because we’re playing a good-boy role and not making noises like the Greeks doesn’t mean Ireland is healthy.”

Ireland’s GDP fell by 3.5 percent in 2008, another 7 percent in 2009, and a further 0.4 percent in 2010.  The economy grew 1.2 percent the first half of this year but even this weak expansion will likely be short-lived.  According to the New York Times:

The Economic and Social Research Institute, based in Dublin, recently cut its 2012 growth forecasts for Ireland in half, to under 1 percent. It cited an expected recession in the wider euro zone, in part because the austerity being pressed on much of Europe by Germany and the European Central Bank is seen as worsening the prospects for recovery rather than improving them.

In fact, the Irish government announced in November that it will be forced to raise taxes and cut spending again in 2012.  The reason: despite all its efforts the size of the national debt continues to growth.  The budget deficit is projected to hit 10 percent of GDP this year, still sizeable even though down from 32 percent of GDP in 2010.  The government fears that without drastic action it will be unable to continue paying its debts. 

Perhaps not surprisingly, the Irish people are beginning to say “enough is enough.”  The New York Times highlights one indicator of the change:

On a recent frosty night in Dublin, David Johnson, 38, an I.T. consultant, stepped outside a makeshift camp set up by the Occupy Dame Street movement in front of the Irish Central Bank. “This is all new to Ireland,” he said, pointing to tarpaulins and protest signs that urged the government to boot out the International Monetary Fund and require bondholders to share Irish banks’ losses that have largely been assumed by taxpayers. “The feeling is that the people who can least afford it are the ones shouldering the burden of this crisis.”

The December 3rd Spectacle of Defiance and Hope in Dublin, captured in the video below from Trade Union TV, is another.  

[youtube] http://www.youtube.com/watch?feature=player_embedded&v=58wZmRadHwk[/youtube]

The following charts published in the New York Times highlight some of the trends discussed above.

Ireland’s road to debt and austerity is illustrative of the general situation in Europe.  Working people are being squeezed to protect profits and ensure the stability of existing economic relations.  Significantly, the leaders of France and Germany have just announced their long term plan for ending Europe’s crisis: adoption of tough new limits on government borrowing.  Clearly this is a desperate attempt to head off any meaningful challenge to the existing system.  At some point, and one hopes sooner rather than later, working people throughout Europe will see through this game, recognize their common interests, and take up the difficult but necessary job of economic restructuring. 

The deficit commission failed to produce a plan to cut deficit spending by $1.2 trillion over the next ten years.  According to the ground rules of the agreement that created the commission, its failure is supposed to trigger approximately $1 trillion in “automatic” spending cuts that will go into effect beginning January 2013. 

The agreement included the following stipulations for guiding the automatic cuts:

• Approximately 50% of the required reduction is to come from the so-called security budget (national security operations and military costs).  
  

•  Approximately 32% is to come from non-defense discretionary programs (health, education, drug enforcement, national parks and other agencies and programs).  

• About 12% is come from Medicare (reduced payments to Medicare providers and plans).   

• The rest is to come mostly from agricultural programs.  

To be clear, these are reductions to be made in projected budget lines.  In other words, the cuts to the security budget will not produce an actual decline in security spending, only a slowdown in the projected increase previously agreed to by Congress. 

As previously discussed the failure of the commission is a good thing.  The commission was actively considering structural changes to a number of key social programs.  One was to change the formula for calculating social security payments so as to reduce them.  Another was to raise the age at which people could access Medicare. The automatic cuts, if enacted, will reduce spending on important programs, but at least they do not include steps towards their dismantling.  In fact, Social Security and Medicaid are exempt.

The next stage of the budget battle has been joined.  Political forces are maneuvering to change the formula for the automatic cuts mandated by the budget agreement.  In fact, this maneuvering began weeks before the commission formally announced its failure to agree on a deficit cutting plan.  According to a November 5, 2011 New York Times report:  

Several members of Congress, especially Republicans on the House and Senate Armed Services Committees, are readying legislation that would undo the automatic across-the-board cuts totaling nearly $500 billion for military programs, or exchange them for cuts in other areas of the federal budget.

We need to enter this budget battle with our own plan.  That plan must include blocking further cuts to non-defense discretionary programs and Medicare.  It is worth recalling that the agreement that established the deficit commission already included approximately $1 trillion in cuts to non-defense discretionary programs.

It is the security budget that we need to focus on.  And we need to be clear that our aim in demanding cuts to that budget, as well as tax increases on the wealthy and corporations, is to help generate funds to support an aggressive federal program of economic restructuring not deficit reduction.

The table below makes clear just how important it is to target the security budget.  It shows the pattern of  federal spending on discretionary programs, defense and non-defense, over the years 2001 to 2010.  The big winner was the Department of Defense, which captured 64.6% of the total increase in discretionary spending over those years.  It was still the big winner, at 36.9%, even if one subtracts out war costs.   

While the defense gains are staggering, they do not include spending increases enjoyed by other key budget areas dedicated to the military.  For example, many costs associated with our nuclear weapons program are contained in the Energy Department budget.  Many military activities are financed out of the NASA budget.  And then there is Homeland Security, Veteran Affairs, and International Assistance Programs.  It would not be a stretch to conclude that more than 75% of the increase in spending on discretionary programs over the period 2001 to 2010 went to support militarism and repression.  No wonder our social programs and public infrastructure has been starved for funds.

There is no way we can hope to reshape our economy without taking on our government’s militaristic foreign and domestic policy aims and the budget priorities that underpin them.  

The Congressional deficit commission (also known as the super-committee), which is charged which recommending ways to reduce the national deficit by some $1.2 trillion over the next ten years, appears headed for failure.  And that is a good thing.  

The commission has until Monday, November 21, to submit a plan to the Congressional Budget Office for evaluation.  The plan must then go to the full Congress for an up-or-down vote no later than Wednesday November 23.  Anything can happen but the reports suggest that the six Republicans and six Democrats remain deeply divided, with the Republicans demanding that deficit reduction be achieved only through spending cuts and the Democrats demanding that tax increases be a part of the plan.

The History of the Deficit Commission

The deficit commission was established in August as part of the deal that secured an increase in the national debt ceiling, giving the Treasury authority to borrow enough money to cover approved expenditures through fiscal 2012.  Republicans and Democrats both agreed that projected future deficits had to be reduced but then, as now, the Republicans wanted to achieve that goal only through spending cuts while the Democrats wanted some tax increases in addition to the spending cuts.  

In order to win Republican support for an increase in the debt ceiling and avert a federal default a compromise was struck.  The two parties agreed to reduce spending by some $1 trillion, with 35% of the spending reduction coming from security related budgets (military and homeland security) and the rest coming from non-security discretionary budgets (infrastructure, clean energy, research, education, as well as programs that help low income people with child care, housing, community service, etc.).  The compromise also included the creation of the deficit commission, which was given the charge of recommending ways to reduce future deficits by an additional $1.2-1.5 trillion.  

What made the commission especially dangerous is that both Republicans and Democrats agreed that the committee would be free to consider a full range of options, including permanent changes to Social Security, Medicare and Medicaid programs.  In fact, Democrats made clear that they would support cuts in those programs if Republicans would only accept some tax increases on the wealthy and corporations. 

If the commission failed to agree on a plan, which required only majority support, Congress would have until January 15 to approve its own plan.  And if they failed, automatic spending cuts would be triggered, with approximately half of the reduction coming from security budgets and the other half from non-security discretionary budgets.  Significantly, the automatic budget cuts would not take effect until fiscal 2013, meaning not until after the next presidential election.

A False Crisis

The premise underlying the creation of the super-committee is that federal spending is out of control, especially on social programs, and that if real deficit reduction is not achieved we face economic chaos.  More recently some supporters of deficit reduction point to European government debt problems as an omen of what awaits us if we don’t act quickly and decisively. 

The fact of the matter is that social spending is not driving our deficit and debt problems.  The primary drivers are our military spending, including our wars in Iraq and Afghanistan; the Bush-era tax cuts; and our economic crisis.  If we truly want to stabilize our national finances we need to halt our wars, raise taxes on the wealthy and corporations, and engage in serious public spending to generate equitable and sustainable economic growth.

 Moreover, there is no reason to believe that we are facing a debt crisis.  The ratio of public debt to GDP is predicted to remain comfortably below the 100% level for at least a decade, the level that some experts claim marks the danger zone.  The U.S. government has no trouble borrowing money to fund its operations.  Actually, investors throughout the world want U.S. Treasures because of their safety.  Moreover, as Paul Krugman points out, even high debt ratios are not automatically dangerous if countries are able to borrow in their own currency, which is the situation for the U.S. government:  

You hear that claim all the time. America, we’re told, had better slash spending right away or we’ll end up like Greece or Italy. Again, however, the facts tell a different story.

First, if you look around the world you see that the big determining factor for interest rates isn’t the level of government debt but whether a government borrows in its own currency. Japan is much more deeply in debt than Italy, but the interest rate on long-term Japanese bonds is only about 1 percent to Italy’s 7 percent. Britain’s fiscal prospects look worse than Spain’s, but Britain can borrow at just a bit over 2 percent, while Spain is paying almost 6 percent.

What has happened, it turns out, is that by going on the euro, Spain and Italy in effect reduced themselves to the status of third-world countries that have to borrow in someone else’s currency, with all the loss of flexibility that implies. In particular, since euro-area countries can’t print money even in an emergency, they’re subject to funding disruptions in a way that nations that kept their own currencies aren’t — and the result is what you see right now. America, which borrows in dollars, doesn’t have that problem.

Why “Failure” Is A Good Thing

Our biggest danger is not runaway debt but austerity.  And that brings us back to the deficit commission.   

Nothing good can possibly come out of the work of the deficit commission.  If an agreement is reached it will include proposals to reduce the deficit through significant spending cuts and as a consequence we can expect two bad outcomes.  First, the cuts will weaken our economic recovery, and a weaker economic recovery will worsen the budget deficit, triggering demands for further spending reductions.  Second, the cuts will include damaging changes to our social programs, including Social Security and Medicare, which will be hard to undue.  And there is no need to weaken either program.  In fact, there are many reasons for increasing Social Security payments and expanding Medicare.

If the deficit commission fails to agree on a plan, we can be reasonably sure that Congress will do no better, and the automatic cuts will be triggered.  But, these automatic cuts will have only limited effect on our social programs.  For example, Social Security cannot be touched.  Most importantly they will not take place for over a year, giving us time to demand new policies. 

In short, we must resist the media’s attempt to panic us into rooting for a bad deal.  We don’t face any budgetary crisis.  The collapse of the deficit commission is our best possible outcome given the current political environment.  The occupy movement is beginning to influence our national dialogue and that means growing power to change our choices. 

Our demands must remain focused on economic transformation.  We need more and better directed government spending, spending that doesn’t just support our existing economic structure but is designed to reshape existing patterns of employment, production, and investment.  And that spending needs to be financed by slashing our military budget, changing our foreign policy, and boosting taxes on the wealthy and corporations.  Someday maybe we can have a super-committee that will be charged with recommending the best way to accomplish those goals.