Archive for August 8th, 2011

Downgrading America: Frustrati vs. Tea party

The historic downgrade of US Bonds by Standard and Poors — with a threat of a further downgrade if nothing is done to reduce debt, is a moment that should wake Americans up.   This crisis is serious and it’s real.   We can’t stimulate the economy with greater spending because bond downgrades will do more harm than the good any stimulus might do.  There are structural flaws in the US economy that need to be fixed, and the only politically possible way to do so is for both parties to find a way to compromise.

The economic imbalances are real.   Government debt to GDP is at 100%.   Private and government debt to GDP combined is near 400%, and foreign held US debt is between $14 and $15 trillion.    This is serious.   Years of debt, current account deficits and bubble economy delusions have led us into a pit from which there is no easy way out.   It’s not just “another recession,” or part of the business cycle.   It’s not something we can stimulate ourselves out of and return to growth.

President Obama should call on Congress to return and take decisive action.   Standing in the way of doing this are two groups.   The tea party folk are well known — they oppose all tax increases (and would prefer cuts) and many wouldn’t have minded if the US defaulted on its debt.  They generally believe government is bad and thus demand massive spending cuts.   Another group, called ‘the Frustrati’ by blogger Norbrook, believe that the President needs to stand up for purely progressive ideals, protect virtually all government spending, raise taxes and cut only defense.

Both the frustrati and the tea partiers think the establishment of their parties has sold out to “Washington insiders,” and by being more ideologically pure they can achieve true success.    Many on the left are furious with Obama for agreeing to spending cuts at all, and believe that if only he had been stronger and more forceful things would be different.

However, Obama has stared down the frustrati and made it clear that he isn’t giving in to their demands, no matter how much they threaten to withhold money and support.   He knows that the progressive wing of the Democratic party is no more popular than the tea party; Americans want compromise and centrism.   John Boehner, on the other hand, worried about the fragile state of Republican unity in Congress, has done everything he could to keep the tea party satsified.  Boehner has not led, he has followed.

Many on the left don’t really recognize the true scope of the crisis and tend to interpret things in partisan political terms.   They think the problems we face came from President Bush’s wars and tax cuts, and all we need to do is fix that and get back to the happy days of the late 90s when the country ran a surplus.   The problem is that the brief surplus was built on a bubble, while private debt, accumulated foreign debt, and the current account deficit continued to build.   Things weren’t all rosy and sweet in 1999.

The tea party, however, is even more off base.  During the last thirty years we’ve also seen a hollowing out of the middle class, a vast shift of wealth to the wealthiest, and a consumer base that survived on debt and cheap Chinese products at Walmart.    One chart that demonstrates how the growth we did have was misdirected is here:

Note growing productivity since 1989 — that produces more wealth and value.    But middle class and working wages stayed low, both public employees and private sector workers barely kept up with inflation.   This is not what happened in most other countries; in Germany working class wages have gone up significantly since 1985.    I’ve posted other charts that show the same thing: the gap between the rich and the poor has been growing dramatically, during the recent boom most of the country’s income hasn’t even kept up with inflation.

This state of affairs is very bad for the economy.   The wealth imbalance fed the bubble economy, but didn’t grow the economy at home.    A huge chunk of that wealth goes to consumption of  foreign produced goods; even the argument that it gets invested back in the economy is misguided — in our global age most investments do not stay in our borders.   If that wealth was being spent by a viable middle class consumer base it would do far more to stimulate growth and create a sustainable economy.   This shifting of wealth to the elite resembles third world economic relations, and has led to a fundamentally dysfunctional economy.

This is where the tea party is way off base.   We need to address this imbalance in part by taxing the wealthy in order to create incentives for job creation and increased wages for the middle class.   To cut government spending in a way that hurts the poor and elderly while protecting the wealth gains of those who have made off so well in the last twenty years is utterly insane.   The tea party’s core ideals are based on a complete fantasy — it’s ideology on steroids, resistant to facts, evidence and reality.

The President needs to address the nation again and lay out the seriousness of the challenge.   He has to tell Congress that they must undo the damage done by the downgrade by agreeing to his $4 trillion deal and accepting tax increases.  He has to make it a priority to not just create jobs, but to assure that the working and middle class get paid fairly.   Relying on the market to do it alone doesn’t work; markets are not magic.    The frustrati have to accept entitlement reform, cuts to programs they believe are valuable, and a downsizing of federal government.    The tea party has to accept higher taxes, more regulation of the financial sector, and cuts to military spending.

That’s not easy.  If a couple has been living beyond their means, how do they adapt?   At first each one might want to keep doing what they’ve been doing and have the other cut back.  Ultimately, that doesn’t work.    Politically there is no other alternative then a compromise than neither side finds acceptable — but one that actually works to address the problem rather than put it off.

Restructuring the economy will take time.   As I noted in January, power may shift from the federal government to state and local control.    It may be years before we get back to unemployment levels back at 5 or 6%.   It may be a decade before we see the economy described as “healthy.”   This is real and the longer we wait to do something significant, the harder it will be to pull ourselves out of the hole we’ve been digging.

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