fiscal chicken

It Was Never About the Deficit


Chancellor’s Professor of Public Policy, University of California at Berkeley explains that the fiscal cliff debate was never about the budget deficit. The deficit isn’t the issue – “it’s the economy, stupid!”  In fact, he demonstrates that federal deficits are actually dropping as a percent of the total economy. Few economists can explain it better:

For the fiscal year ending in September 2009, the deficit was 10.1 percent of the gross domestic product, the value of all goods and services produced in America. In 2010, it was 9 percent. In 2011, 8.7 percent. In the 2012 fiscal year, it was down to 7 percent.

The deficit ballooned in 2009 because of the Great Recession. It knocked so many people out of work that tax revenues dropped to the lowest share of the economy in over sixty years. (The Bush tax cuts on the rich also reduced revenues.) The recession also boosted government spending on a stimulus program and on safety nets like unemployment insurance and food stamps.

But as the nation slowly emerges from recession, more people are employed — generating more tax revenues, and requiring less spending on safety nets and stimulus. That’s why the deficit is shrinking.

But What About the Future?

Deficits, however, are projected to rise again as a percent of GDP. So what’s the cause? It seems the two main drivers, apart from out-of-control military spending, are:

  • the rising costs of health care (Health care now consumes 18% of the total economy and 25% of the federal budget.)
  • Aging baby boomers expected to need more medical treatment.

So, as Reich points out, if the politicians were really concerned about those future budget deficits, they’d be focusing on reducing future healthcare costs – how strengthen the cost controls in the Affordable Care Act, or move, like other advanced nations, to the much more efficient single-payer system.

But instead, they’re debating the size of government – a subject entirely irrelevant to the economic issues at hand.

But Isn’t Government Too Large?

military spending


No, as Professor Reich points out, U.S. non-military government spending relative to the size of the U.S. economy is the smallest of any wealthy nation. Government spending on “entitlements” isn’t the problem.  Any economist worth his salt can cite the real reason for the economy’s imbalance: record corporate profits and the increasing concentration of wealth at the top, as the median wage continues to drop no matter how the economy grows. The share of the economy going to wages vs. profits is the smallest in recorded U.S. history. If you really want to talk about “entitlements,” the real elephant in the room that everybody’s afraid to look at is shown in the above chart.

Didn’t the Fiscal Cliff Deal Raise Taxes on the Wealthy?

Yes and no. The back story here is that, while it raised income tax rates for those earning over $400,000 a year, it was actually a huge tax cut for the wealthiest – those who inherit their wealth, and generate wealth through speculation and investment rather than labor.

Prior to the fiscal cliff, rates for unearned income were set to increase from 15% to almost 40%. Instead, the deal that was worked out just after the stroke of midnight of the New Year lowered this to 20%. It may look like an increase, but it is in fact an incredible windfall to the very culprits who brought about the economic crisis and caused the deficit in the first place.

A Game of Chicken

Nobody’s happy with the less-than-grand bargain. Democrats blame President Obama for squandering his leverage as a popularly elected president with a mandate to raise taxes on the wealthy and not on everyone else.  Republicans blame their side for caving on tax increases on the so-called “job creators.” So who, besides the billionaires, really won?

Both parties were playing a game of chicken driving toward the fiscal cliff and both sides flinched – the Democrats flinched to avoid harming the unemployed, the middle class and the underclass, and the Republicans flinched to avoid having to increase taxes on billionaires.

If anyone is surprised that the fiscal can gets continuously kicked down the road, that’s precisely the strategy of the wealthy – to create cycles of boom and bust – growth cycles fueled by deficit spending under Republican administrations to generate more wealth, followed by contractions, during which time, the middle and lower economic classes repay those deficits and wealth gets further concentrated and redistributed to the 1%.

In other words Deficits Were Purposely Created To Cause This “Crisis.”  It’s been the pattern since President Reagan, and was acknowledged to be the case by both Reagan and Bush Jr. The deficits aren’t actually the problem – they are a deliberate strategy in the game of upward redistribution. The real back story is that the pundits and political poseurs who hide behind the mantle of libertarianism and the free market claiming that taxation is highway robbery are themselves the robbers.

From the Horse’s Mouth

And if anyone doubts that this is the case, take it from the horse’s mouth. A privileged and out of touch Tom Brokaw recently stated on Meet the Press that:

And, you know, the fact of the matter is that we’re all living longer as well. Social Security can go up if you give it some lead time to retire at 67 and probably 20 years from now to retire maybe at 70 because people are staying in the workplace longer.

Solipsistic ultra wealthy people like him who do nothing more than read from a teleprompter may think so, but they are missing an important consideration: The fact that people are living longer doesn’t mean that they are healthy enough to stay in the work force. Are 70 year olds fit enough to perform physical labor? Is it a good idea to have 70-year-olds driving trucks cross country?

And is keeping older people in the workforce really a way to provide opportunity to up-and-coming generations, or does it actually stop new people from moving up the ranks?

And now that people are finally talking about cutting Social Security payments, the following chart is worthy of consideration.  Seniors depend on Social Security as a mains source of income:

The back story here is that the money movers want to get their hands on the massive amounts of money in the Social Security Trust Fund to speculate and lose, as they did in the years leading up to the mortgage crisis. And they want to do it unfettered by regulation or any fiduciary responsibility, guided solely by the profit motive – the profits of shareholders, not senior citizens.

Conclusion: Willy Sutton Would Be Proud

Do you remember the infamous bank robber Willy Sutton, and how he responded when asked why he chose to rob banks? “Because that’s where the money is,” he explained.