Monday, July 25, 2011

The Debt Death Spiral

Here is an excellent post by Robert Reich on his blog:
Vicious Cycles: Why Washington is About to Make the Jobs Crisis Worse

We now live in parallel universes.

One universe is the one in which most Americans live. In it, almost 15 million people are unemployed, wages are declining (adjusted for inflation), and home values are still falling. The unsurprising result is consumers aren’t buying — which is causing employers to slow down their hiring and in many cases lay off more of their workers. In this universe, we’re locked in a vicious economic cycle that’s getting worse.

The other universe is the one in which Washington politicians live. They are now engaged in a bitter partisan battle over how, and by how much, to reduce the federal budget deficit in order to buy enough votes to lift the debt ceiling.

The two universes have nothing whatever to do with one another — except for one thing. If consumers can’t and won’t buy, and employers won’t hire without customers, the spender of last resort must be government. We’ve understood this since government spending on World War II catapulted America out of the Great Depression — reversing the most vicious of vicious cycles. We’ve understood it in every economic downturn since then.

Until now.

The only way out of the vicious economic cycle is for government to adopt an expansionary fiscal policy — spending more in the short term in order to make up for the shortfall in consumer demand. This would create jobs, which will put money in peoples’ pockets, which they’d then spend, thereby persuading employers to do more hiring. The consequential job growth will also help reduce the long-term ratio of debt to GDP. It’s a win-win.

This is not rocket science. And it’s not difficult for government to do this — through a new WPA or Civilian Conservation Corps, an infrastructure bank, tax incentives for employers to hire, a two-year payroll tax holiday on the first $20K of income, and partial unemployment benefits for those who have lost part-time jobs.

Yet the parallel universe called Washington is moving in exactly the opposite direction. Republicans are proposing to cut the budget deficit this year and next, which will result in more job losses. And Democrats, from the President on down, seem unable or unwilling to present a bold jobs plan to reverse the vicious cycle of unemployment. Instead, they’re busily playing “I can cut the deficit more than you” — trying to hold their Democratic base by calling for $1 of tax increases (mostly on the wealthy) for every $3 of spending cuts.

All of this is making the vicious economic cycle worse — and creating a vicious political cycle to accompany it.

As more and more Americans lose faith that their government can do anything to bring back jobs and wages, they are becoming more susceptible to the Republican’s oft-repeated lie that the problem is government — that if we shrink government, jobs will return, wages will rise, and it will be morning in America again. And as Democrats, from the President on down, refuse to talk about jobs and wages, but instead play the deficit-reduction game, they give even more legitimacy to this lie and more momentum to this vicious political cycle.

The parallel universes are about to crash, and average Americans will be all the worse for it.
It is truly amazing that people elected to represent constituents show little concern for the world of Main Street, the lack of jobs, the horrible effects of unemployment, the tragedy of on-going home foreclosure, the homelessness, the despair. Instead, Washington is focused on the "problem" of debt. Just 8 months ago nobody in Washington was worried enough about "debt" to stop the extension of the Bush tax cuts and the fact that that would drop revenues and run up the deficit by something like $4 trillion over the coming decade. But now, 8 months later, the whole world is supposed to come to a stop because the politicians have discovered they can argue about "debt". That's the only issue.

Fundamentally I blame the Republicans. They are completely cynical in the way they are playing "debt". They don't want to find a solution. They want to wreck the economy so that people will blame that "socialist" Obama who ran up the debt (neatly forgetting that a big chunk was from Bush 43 who did pharmacare and two wars with not tax increases and whose right wing "deregulate" politics meant fraud on Wall Street went undetected until it caused the Little Depression of 2008-2018).

I blame Obama for refusing to stand up to the Republicans and take them on to provide real help for the bottom 90%. I blame the Democrats for playing along with Obama and the Republicans.

What a mess.

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