Sunday, August 1, 2010

What If the Government Really Did Budget Like Families Do?

There was an interesting story on the HuffPo site by Johann Hari site a couple of days ago about the decision of Moody’s, the leading credit agency, to downgrade Ireland’s bond rating from Aa1 to Aa2. No, I don’t pretend to be economist enough to understand all the implications and repercussions (it would be nice if a few folks in Congress admitted similar ignorance), but the story caught my eye because of my affection for that country and because of Hari’s discussion of the implications of the Irish situation for the US:
The Republicans want to bring this vision from Ireland… to the US. They say–yes, this is rough, yes, it hurts, but it is for a necessary purpose. If we don't do it, the bond markets will downgrade our debt and we will be even worse off. Only austerity can hold off the prospect of a debt crisis.

So let's return to the truth buried in that little story on the financial pages. Ireland has been doing exactly what the Republicans urge, with a two year headstart. What are the results? Last week, a study by the International Monetary Fund nobody's idea of a left-wing pressure group—found that country’s economic collapse now “exceeds that being faced by any other advanced economy, and matches episodes of the most severe economic distress [anywhere] in post-World War Two history.”

Why? During a recession, ordinary consumers quite sensibly cut back and spend less. But if the government does the same, it means nobody is spending. This is bad enough for all the people who suffer immediately: the swelling army of the unemployed, the repossessed, the abandoned. But it turns out it makes its original goal—paying off the debt—impossible too. As the Nobel Prize-winning economist Joseph Stiglitz explains: “If you introduce austerity measures, the amount you can raise in tax falls, and welfare payments go up—so you don't have enough money to pay your debts anyway.”
If nothing else, I rather appreciate the phrasing of Stiglitz’s “cautionary note against deficit fetishism.” Hari also argues that:
When consumer spending collapses, governments need to borrow and spend to prevent a depression—and then pay off the debt from the proceeds of growth once we have brought the good times back. It's revealing that the countries that have done this hardest and fastest—like South Korea, which spent a fortune on employing people to green the country's infrastructure -- have been the first to pull out of this recession, while the countries glugging Republican-juice have sunk deeper into the gloop.
Needless to say, Hari goes on to assert that “the choice today is between a deficit and a depression. It is immoral not to borrow and spend when it could revive the economy and prevent all these lives being written off.”

A couple things intrigue me about this. One is the manifest hypocrisy of the Republicans, who exploded the deficit with their pet projects (read: tax cuts for fat-cats) but now fret about it with deep and abiding concern. Isn’t it about time somebody called “bullshit” on this tactic? Here are the facts for the last 50 years, based on figures posted on the website: From 1961-69, i.e. the Kennedy and Johnson administrations, federal debt as a percentage of GDP fell from 53.04% to 35.93%, a reduction of nearly a third. The Nixon/Ford years produced little change, as the percentage dropped slightly to 34.42% in 1977. The much-maligned Carter administration further reduced the rate to 31.91% in four years. By 1993, Reagan and Bush the elder had more than doubled that number to 66.17%, all the while yammering about fiscal responsibility. Then came Bill Clinton, who lowered the rate to 56.46% by 2001. Then, guess what? Along comes Bush the Lesser and the percentage shoots up to 83.29% by 2009.

In summary, then: every Democratic president in the last 50 years except Barack Obama, who inherited an economy in free-fall, has reduced the federal debt as a function of GDP. Every Republican president since (and including) the sainted Reagan has increased that debt percentage significantly. So this isn’t at all about Republicans caring a whit (or something that rhymes with “whit”) about the deficit. It’s all about budgetary priorities. If they’d admit that, I’d still disagree, but I might be able to muster a little respect (or at least less contempt) for their position.

But the other element of the Republican talking points that catches my attention is the whole conflation of government economic policy with family finances. In these difficult times, the argument goes, everyday people are being forced to tighten their belts; the government should do the same. Let’s leave aside the fallacy of considering these two fundamentally independent concepts as if they were the same thing. Let’s pretend, in other words, that the parallels are legitimate.

What, then, would the Republican strategy mean to a household? Well, they’d spend less (or they'd say they would, which isn't quite the same thing). In the world of family budgets, it probably is a good idea to put off buying the big-screen TV or the new Jacuzzi when times are tough. You might go out to eat less often, watch Netflix instead of going to the movies, keep your house a little cooler in the winter and warmer in the summer.

But there are some expenses you just can’t forgo. If you’re looking for work, cutting off your internet service might save you a few dollars in the short term, but it will also inhibit your ability to find out about job opportunities or to apply for those that do exist. If you live several miles from your place of employment, you could save money by not driving to work, but you run the risk of losing your job. If you’re a contractor, turning off your cell phone will save you perhaps $1000 a year, but prospective customers (or your telephone service) can’t contact you, and your business losses will outpace the savings. Cutting expenditures on clothes might be an option… unless you go for an interview at a place where dressing well is a job requirement. And on and on.

Similarly, fiscal responsibility in government is a good thing. Cutting back on unnecessary spending—say, a pair of bright shiny wars that have already cost nine years, over a trillion dollars (that’s $1,000,000,000,000) and over 5,000 Americans’ lives (not to mention the tens of thousands of Iraqi, Afghani, and Pakistani civilians who have also perished in the conflict)—might be a good idea. But refusing to spend money to stimulate job growth, to provide a safety net for those put out of work through no fault of their own, to provide short-term support for an automobile industry that directly or indirectly provides literally millions of jobs: that’s the equivalent of refusing to take your flu-ridden kid to the doctor because the credit-card bills are already kind of high.

And then, of course, there’s the income side. We don’t want any more than we’ve already got. Yes, we’re having trouble paying the bills, but collecting over half a trillion dollars (an estimated $564,000,000,000) just by allowing tax cuts on people making over $200,000 a year to expire—well, that, in Republicania, is simply beyond the Pale. Imagine if households really operated the way the Republicans say the federal government should: “No, that pay cut I took a few years ago, don’t worry about taking me back to my old income; we’ll just eat less, and my friend says sending your kids to college is over-rated, anyway.”

Don’t get me wrong. There is plenty of pork in every budget, and probably a considerable amount of our old friends Waste, Fraud, and Abuse, too. Nor does either party have a monopoly on self-righteous posturing or on prioritizing re-election over the common weal. That said, even if we buy the Republican talking point analogizing from federal spending to household budgeting, their argument just doesn’t make sense.

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