May 08 2017

The Democratic Magic Asterisk

Democrats, to the extent they endorse Neo Liberal Economic Policy, are no less committed to stealing from the 99% for the benefit of Billionaires than Republicans are. If you’re one of the fortunate few on whom that has no negative effect AND you care about discrimination and bigotry (and I would posit a majority of the 1% couldn’t give a rat’s ass about it because, hey baby, I got mine) then Democrats are the Party for you. Unless you happen to support a Woman’s Right to Choose which no less august a figure than Nancy Pelosi tells us is ‘optional’ and ‘not a litmus test’.

And don’t think I’m letting Bernie skate. Both his and Pelosi’s endorsement of Heath Mello for Mayor of Omaha have at best the thin veneer of ‘lesser evilism’ and that dog stopped hunting here a long time ago (hard to believe it but I’ve been away from dK a lot longer than I was ever there). I think it’s a crime when Democrats (or affiliated Independents) decide against promoting policies that are not only morally righteous but also overwhelmingly popular.

Moreover I think that until Democrats stop doing that and shoring up the Republican Party as a Washington Generals foil against which their ‘there is no alternative’ (hah Gertrude Stein) posturing continues to betray real democracy, chances of ‘electoral victory’ are thin at best, Truman was right- “Given the choice between a Republican and someone who acts like a Republican, people will vote for the real Republican all the time.”

The Democrats’ Myth on Deficits
By Dean Baker, Truthout
Monday, May 08, 2017

Republicans are not the only ones who push deficit myths. The Democrats have their own, which while not quite as wrong-headed, can lead to equally bad policy.

The Democratic deficit myth centers on the deficit reduction during the Clinton years. According to the myth, Clinton took the politically hard steps needed to balance the budget and eventually run a surplus. He cut spending and raised taxes. He faced unified opposition in this course from the Republican Party and also had to overcome dissent within his own party.

But it turned out this was the right course. The economy boomed, unemployment plummeted and workers up and down the wage distribution saw substantial gains in real wages.

However the glory days came to an end when George W. Bush entered the White House and blew the surplus on tax cuts targeted to the rich and his wars in Afghanistan and Iraq. The budget returned to deficit, the economy slowed, and we eventually got the economic crash in 2008.

Just about every part of this Democratic myth is wrong. First, Clinton’s tax increases and spending cuts did not balance the budget. In 1996, after all the tax increases and spending cuts had been passed into law, the Congressional Budget Office (CBO) projected a deficit equal to 2.7 percent of GDP for 2000. Instead we ended up with a surplus of 2.4 percent of GDP. This would be equivalent to a shift from a deficit of more than $520 billion to a surplus of $460 billion in the 2017 economy.

This massive shift from deficit to surplus had nothing to do with Clinton’s policies. According to CBO’s analysis, legislated changes between 1996 and 2000 actually added modestly to the deficit.

The real story of this shift from deficits to surplus was more rapid growth in the economy. This was driven on the supply side by an unexpected uptick in productivity growth. On the demand side, a stock market bubble led to a boom in consumption and investment.

The stock bubble burst beginning in 2000, which gave us the recession in 2001. The investment driven by the bubble, largely in the tech sector, collapsed when investors suddenly decided they cared about profits. The consumption boom driven by the stock wealth generated through the bubble also ended as the stock market fell back to more normal levels.

This recession was the biggest factor turning the surplus to a deficit. The recession proved difficult to escape, largely because it is not easy to recover from bubble driven recessions. While the recession was short and mild if we look at GDP growth, the economy continued to shed jobs for almost two years after the recession officially ended. We didn’t get back the jobs lost in the downturn until January of 2005. Until the collapse of the housing bubble, this was the longest period without net job growth since the Great Recession.

In this context, the deficits run by the Bush administration were beneficial to the economy. While tax cuts for the rich and spending on war are hardly the best way to boost an economy out of recession, they are certainly better than nothing from the standpoint of generating demand. If Bush had insisted on tax increases to pay for his wars, the recession would have been worse.

The economy’s problem at this time was too much saving, not too little. Ben Bernanke, who was then a Fed governor, complained about a worldwide savings glut. This means that we had too little demand in the United States and elsewhere in the world. This is a situation that should call for larger budget deficits (or smaller trade deficits), not balanced budgets.

Anyone who tries to link the housing bubble and subsequent crash to the Bush deficits simply has no clue what they are talking about. The Bush administration deserves to be criticized for a colossal regulatory failure, but there is absolutely zero reason to believe that Democratic economists would have done anything differently if they had been in charge at the time.

In short, the results of a large increase in the budget deficit are likely to be more good than bad. Just to be clear, giving tax cuts to rich people is a horrible waste of public money. Furthermore the outline of the plan we have seen to date suggests that it will be a windfall for the tax shelter industry.

Deficits. Do. Not. Matter. To the extent anything matters at all it’s Debt Service (Interest) which is currently at record lows in comparison to the total size of the economy. Even if Debt Service did matter all we have to do is print some pretty pieces of paper since our Interest payments are redeemable only in good old green Federal Reserve notes. Democrats will argue, in their Neo Liberal way, ‘ooh, scary deficits’. If they had any understanding of Economics or Politics they would point out that Trump and the Republicans are simply putting money in the pockets of the 0.01% (which works in a strict Keynesian sense but is extremely inefficient, low multiplier). The reason we can’t have nice things like Universal Health Care, a Basic Income Guarantee, and affordable Mass Transit is Economic ignorance and Institutional Democratic Party complicity.

Oh well, anything that thwarts those evil Republicans I suppose.

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