by Robert L. Borosage

Washington’s obsession with deficits is illogical for two reasons: first, there is no sign of accelerating inflation; interest rates are near record lows, as global investors seek shelter in US securities from economic turmoil abroad. We will never have a better opportunity to rebuild our decrepit infrastructure, so there’s no reason for Washington to focus on belt tightening now.

Second, austerity is, paradoxically, likely to undermine the stated goal of deficit reduction. Cutting spending and raising taxes in a weak economy destroys jobs and slows growth. The increased unemployment leads to declining tax revenue as well as increased demands on government services, all of which adds to the deficit. This is the famous “debt trap” recently experienced in much of Europe, where premature and harsh austerity drove many EU countries into recession. Spain, Portugal and Greece have piled up worse debt burdens as their economies collapsed.

With the election behind us, President Obama and the lame-duck Congress return to Washington to face a fiscal showdown, occasioned by automatic tax hikes and spending cuts scheduled to kick in after the first of the year. Most economists, including the nonpartisan Congressional Budget Office, agree that if nothing is done, this arbitrary, Washington-created “fiscal cliff,” as Federal Reserve chair Ben Bernanke dubbed it, will likely drive the economy back into recession.

It is probably already contributing to slower growth. The New York Times reports that manufacturers are delaying capital improvements and postponing hiring for fear that no deal will be made. More than a third of the nation’s school districts have reduced programs and hiring in anticipation. If there’s no deal, domestic agencies face an 8 percent cut across the board in fiscal year 2013. Middle-class families will see an income tax hike of about $1,500, a cut in child tax credits by about $500 per kid, a cut in tuition tax credits by $700 a year, and a hike in the payroll tax of $1,000 a year. Lower-income families will suffer cuts in the earned-income tax credit. The result is renewed discussion of a “grand bargain” to avoid that self-destructive course.

But the “cliff,” with its misleading metaphor of an imminent, irreversible fall, has been misconstrued by the media. These changes are not irrevocable; it’s not as if they can’t be fixed after January 1 (more on this later). But in true shock doctrine fashion, the ersatz crisis is being used to demand changes that would otherwise be politically impossible: cuts in Social Security, Medicare and Medicaid, along with deep cuts in basic government services, combined with tax increases. Wall Street billionaire Pete Peterson has enlisted bankers and CEOs in a multimillion-dollar campaign spearheaded by the hysterical Cassandras of debt, Alan Simpson and Erskine Bowles, former co-chairs of President Obama’s deficit commission, to demand action now. Editorial opinion and much of the punditry, along with a claque of supposedly bipartisan or nonpartisan lobbying groups, have dutifully echoed the call. Gaggles of senatorial aides have been meeting to explore what a deal might look like.

In an initially off-the-record campaign interview in late October with The Des Moines Register, Obama indicated that he intended to offer Republicans a deal similar to the one he offered House Speaker John Boehner in the summer of 2011: meeting the Simpson-Bowles target of $4 trillion in deficit reductions over ten years, with a ratio of $2.50 in spending cuts for every $1 in new revenue as well as “working to reduce the costs of our health care programs.” Since the election, Boehner and Senate Republicans have indicated they would support an agreement that reduces deficits by cutting Medicare and Social Security in exchange for tax reform that lowers rates but raises more revenue through closing loopholes.

Virtually every aspect of this hysteria is wrong. The United States does not have a short-term deficit problem, and the fundamental long-term problem isn’t one of soaring debt; rather, it is the lack of a foundation for sustainable growth that includes working people. Without a political movement to achieve the latter, very little progress will be made on the former.

The grand bargain being discussed in Washington reflects an elite consensus far removed from what voters want. Americans want action on jobs, and most support the president’s call to raise taxes on the rich. Overwhelmingly, they want basic family security programs protected. Any deal that cuts Medicare and Social Security, slows growth and increases unemployment will look a lot more like a grand betrayal than a grand bargain. And virtually the entire organized base of the Democratic Party, from unions to civil rights and women’s groups, is mobilizing in opposition.

Austerity Bites

There are still more than 20 million people in need of full-time work. Mass unemployment guarantees stagnant or falling wages and sputtering growth. Long-term unemployment—40 percent of those out of work have been jobless for more than twenty-seven weeks—erodes skills, confidence and lives. The Federal Reserve, understanding the danger, has used monetary policy to keep interest rates low and pump money into the economy. Yet Americans are still strapped, given declining real wages, the collapse of the value of their homes and the rising cost of necessities, from gas to college education to healthcare. Companies are sitting on trillions in profits, waiting for demand to pick up for their products. The Fed can’t generate the growth we need through monetary policy alone. In this situation, the federal government should be acting to boost the economy.

Washington’s obsession with deficits is illogical for two reasons: first, there is no sign of accelerating inflation; interest rates are near record lows, as global investors seek shelter in US securities from economic turmoil abroad. We will never have a better opportunity to rebuild our decrepit infrastructure, so there’s no reason for Washington to focus on belt tightening now.

Second, austerity is, paradoxically, likely to undermine the stated goal of deficit reduction. Cutting spending and raising taxes in a weak economy destroys jobs and slows growth. The increased unemployment leads to declining tax revenue as well as increased demands on government services, all of which adds to the deficit. This is the famous “debt trap” recently experienced in much of Europe, where premature and harsh austerity drove many EU countries into recession. Spain, Portugal and Greece have piled up worse debt burdens as their economies collapsed.

American CEOs, fearful of the recession that would ensue from the fiscal cliff, have been clamoring for a deal to avoid it. But given the faltering recovery, the same logic applies to the less harsh grand bargain now under discussion. Job creation is barely able to keep up with new people coming into the workforce. Federal government purchases were down last year, as spending from Obama’s 2009 stimulus bill declined, and they are declining again this year. State and local expenditures continue to fall off. The results are felt all over the country as teachers are laid off, aging sewers collapse and Head Start programs close. Streets grow unsafe as police forces are reduced. Adding to the drag on the economy are the budget caps passed by Congress—as part of the 2011 debt ceiling deal—that will reduce discretionary spending by $1.5 trillion over the next ten years. Any new deal would only add to the drag on the economy in a world where Europe is in recession and emerging nations like China, India and Brazil are struggling.

The hysteria about deficits ignores both their source and their solution. Publicly held debt was only about 36 percent of GDP in 2007, before the crash. When the housing bubble exploded, the economic collapse meant falling revenue and rising spending (particularly on unemployment insurance, food stamps and other programs for the jobless). The result just about doubled the debt burden, to 73 percent of GDP. Spending from the president’s recovery act temporarily contributed to the deficits, but that has already petered out. As a result, deficits are coming down; they are currently three-quarters of what they were in 2009, relative to the size of the economy.

Putting people back to work does more to reduce deficits than any other factor. That requires more federal spending now, preferably in areas vital to the economy, like modernizing our infrastructure and keeping teachers on the job. Once the economy is growing and people are working, the deficit will come down. Additional steps can be taken, if necessary, to reduce remaining imbalances and address our long-term debt problem.

It is the long-term, seventy-five-year debt projections—illustrated in the lavish charts that Pete Peterson’s various front groups have plastered across the country—that have terrified so many people. But those long-term deficits come almost entirely from one source: our broken healthcare system. The projected increase in healthcare costs—through Medicare, Medicaid, children’s and veterans’ healthcare—drive long-term deficits. The costs of Medicare and other public healthcare programs are rising more slowly than private healthcare, but even so, in the long term they are unaffordable. As economist Dean Baker of the Center for Economic and Policy Research has pointed out, if per capita US healthcare spending were comparable to what other industrialized countries spend (with better results), we would be projecting budget surpluses as far as the eye could see. The solution requires challenging the predatory oligopolies—the insurance companies, drug companies and hospital complexes—that profit from high costs. Obamacare began that process; Medicare costs have begun to rise more slowly. The sensible solution to our long-term debt problem is continued healthcare reform, not cuts in basic security for Americans.

Other than our broken healthcare system, our structural problem is not so much deficits and debt as that the United States does not have a stable foundation for growth. In 2007, before the recession hit, annual deficits were down to less than 3 percent of GDP, a level that could easily be sustained indefinitely. This was despite the Bush administration’s two unfunded wars, tax cuts and a prescription drug benefit that wasn’t paid for (indeed, the Bush excesses and the Bush economic crash have contributed far more to the current national debt than anything Obama has done). But the low deficits reflected the growth, employment and consumption generated by the housing bubble. We can’t reinflate that bubble, and we shouldn’t want to. As discussed below, we need a different basis for growth.

The most damaging implication behind the call to balance our books now rather than get the economy moving is that it assumes the current recovery is adequate and that mass unemployment is the new normal. We will probably see a flood of articles by economists explaining that high unemployment is structural, and that workers don’t have the skills needed for the twenty-first-century economy. As New York Times columnist and economist Paul Krugman has written, this callous assumption is not only wrong; it condemns millions of people to joblessness and despair.

This election was fought over which candidate and which party would do better at producing jobs and growth. To turn to deficit reduction now would be a great betrayal. But it would not be the only one.

Chump Change

The grand bargain not only offers the wrong answer; it poses the wrong question. In Washington, the bargainers intone the same mantra: It is a time for shared sacrifice. Everything must be on the table, from Medicare, Medicaid and Social Security to tax hikes. We must all do our part.

The call for shared sacrifice makes no sense given that in recent decades, the rewards have not been shared. The middle class lost ground even before the Great Recession, while the wealthiest 1 percent pocketed about two-thirds of the rewards of growth. In the first year after the recession, the top 1 percent pocketed a staggering 93 percent of income growth, as the stock market roared back but housing values and wages did not. The pious summons to shared sacrifice violates both fairness and common sense. Worse, the focus is on programs for ordinary Americans and the vulnerable, not on the people who have made out like bandits. For example: our debt burden nearly doubled because Wall Street’s excesses blew up the economy and drove us into the deepest recession in seventy-five years. So you would think any discussion of how to reduce the deficit would start by demanding that Wall Street pay for the damage it caused. You would be wrong.

We are witnessing the worst inequality since the Gilded Age. The top 1 percent of taxpayers pocket more income each year than the bottom 40 percent, and they own more wealth than 90 percent of Americans. Yet their tax rates are near the lowest in post–World War II history. As billionaire investor Warren Buffett has noted—and as Mitt Romney has demonstrated with his 13.9 percent tax rate on $20 million in income—the richest Americans are often paying lower tax rates than their secretaries. You would think that any discussion of reducing deficits would begin with the assumption that there must be higher tax rates on millionaires and billionaires. You would be wrong.

Multinational corporations based in the United States pay among the lowest effective tax rates in the industrialized world. Many, like General Electric, earn billions in profits and pay nothing. Lower rates, corporate loopholes, offshore tax havens and transfer pricing have reduced the corporate share of federal tax revenues consistently since the 1950s. You would think that any discussion of reducing deficits would begin with a call for higher taxes on corporations and a clampdown on overseas tax havens. You would be wrong.

The military budget has doubled over the past decade, now exceeding what it was, in comparable dollars, at the height of the cold war. The United States and its NATO allies spend more on their militaries than the rest of the world combined. At the same time, domestic spending—with the temporary exception of Obama’s 2009 stimulus bill—has declined as a portion of the economy, despite a growing population and spreading poverty. The president brags that nonsecurity discretionary spending—everything outside the military and guaranteed programs like Social Security and Medicare—is projected to decline to levels not seen since the Eisenhower era. The result is a continued decline in public provision: decrepit sewers, airports and bridges; an outmoded electric grid; inadequate research and development; national parks in decline; infants without adequate nutrition; families without affordable shelter; glaringly inadequate investment in public education from pre-K to college. You would think the focus of any spending cuts would be on the military, not on domestic spending. You would be wrong.

Medicare, Medicaid, and Social Security, the pillars on which family security rests, are not generous. The average annual Social Security benefit is $14,800, sufficient only to put a minimal floor under seniors. The average 65-year-old couple on Medicare will spend an average of $230,000 out of pocket on healthcare over the course of their retirement years. Without Social Security, 14 million more elderly Americans would live in poverty; without Medicare, few would be able to afford medical expenses.

Americans want these programs protected. They are so popular that politicians in both parties vied during the election to show who would protect them the most. Republicans strafed Obama and the Democrats by falsely claiming that they cut $716 billion from Medicare to pay for Obamacare. Joe Biden guaranteed absolutely that an Obama presidency would not allow cuts in Social Security. In an election night poll by the Campaign for America’s Future with Democracy Corps, fully 79 percent of Americans—from across the political spectrum—stated that they would find unacceptable any deal that cut Medicare benefits; 62 percent opposed an agreement that would cut Social Security over time. You would think those programs would be off the table in any discussion. You would be wrong.

The Sting

The general frame for the grand bargain violates almost all these common-sense priorities. In Obama’s 2011 talks with Boehner, the president offered to trade cuts in Medicare and Social Security for a tax reform that lowered rates on the rich and corporations while closing loopholes and exemptions to generate more revenue. Any tax proposal to raise revenue that begins with cutting top rates deserves only scorn. As Romney demonstrated with his mathematically impossible tax proposal during the campaign, raising significant revenue by cutting rates and then closing loopholes isn’t easy. To gain enough revenue, popular middle-class deductions—for home mortgages or employer-provided healthcare—are likely to get hit. And of course, as we saw with the Reagan-era tax law, such reforms eliminate loopholes but not lobbies. Pretty soon, new loopholes are slipped in, while rates remain at the lower level. The overall result: a more regressive, unjust tax system.

How did politicians arrive at this bad bargain? The essential dynamic is that Democrats reward Republican intransigence with concessions. Republicans refuse to hike taxes, so to entice them, Democrats offer the crown jewels: Medicare and Social Security. Republicans still resist tax hikes, so the austerity crowd suggests “reform” that will in theory bring in more revenue while lowering tax rates. Behind this are the big money lobbies that rig the rules: the Wall Street bankers, CEOs and private equity vultures who want to protect the scandalously low tax rates they now enjoy. The result is the outline of a deal that betrays promises made on the campaign trail and compromises the historic legacies of the New Deal and the Great Society. And it does all this while addressing the wrong problem.

No Home to Go Back To

Last fall, as part of his comeback from the disastrous negotiations over the debt ceiling, President Obama put forth the American Jobs Act, calling for a $447 billion program that included $65 billion to rebuild schools and keep teachers on the job, $50 billion in infrastructure spending, an extension of the payroll tax cut and other measures. Senate majority leader Harry Reid offered to pay for it with a surtax on millionaires. This was a no-brainer, estimated to create another 1.9 million jobs by 2013. Republicans blocked all but a few minor parts. Mysteriously, Obama walked away from his own plan, choosing not to make an issue of it during the campaign.

Many assume that the White House will seek to add some money for jobs in the coming grand bargain, as a sweetener for Democrats. But this economy needs far more than a short-term spending jolt. Although austerity and stimulus head in opposite directions, they share one assumption: that there will be a healthy economy to return to one day. Austerians would cut deficits and regulations. Stimularians would spend money and put people back to work. But the economy was not working for most Americans even before the Great Recession. The Bush years witnessed the first “recovery” in which most American households lost ground. Most real incomes went down, not up. The wealthiest few captured most of the rewards of growth. The middle class took on greater and greater debt simply to stay afloat.

The Excluded Alternative

The debate we should be having is about how to make the economy work for working people again, how to revive a broad middle class and make the American Dream more than a nostalgic fantasy. That would require both investments now in areas vital to our future and a fundamental change of course. It would include a strategy to revive domestic manufacturing and thus reduce the destabilizing trade deficits that have contributed to the global crisis. It would include an industrial policy designed to help the United States lead the new global green revolution. A serious long-term commitment to rebuild America would renovate our infrastructure to withstand the extreme weather that is already upon us. It would break up the big banks and shackle finance so that it serves, rather than threatens, the real economy. Measures to transform corporate governance, curb excessive executive compensation, and empower workers to organize and bargain collectively would help counter extreme inequality.

The new foundation would also require doing at least the basics in public education: universal preschool, small classes in the early years, greater rewards and respect for teachers, after-school programs, affordable college and advanced training. And of course it would feature progressive tax reform, compelling the wealthy and corporations to pay their fair share. It would continue healthcare reform and guarantee affordable care as a right for every citizen, not a privilege allowed only to those who can afford it. This requires taking on the most powerful and entrenched interests: multinationals that drive trade policy, Big Oil’s hold on energy policy, Wall Street’s grip on financial regulation, the military-industrial complex, the medical-industrial complex and more.

In the salad days of his presidency, Obama called for rebuilding the economy on a new foundation, not on the shifting sands of debt and bubbles. His recovery act, healthcare reform, Wall Street reforms and energy bill were first steps in that effort. But just as his premature turn to deficit reduction sabotaged the need to expand the initial recovery act, his turn now to a grand bargain will squelch any serious discussion of fundamental reforms.

Will Democratic legislators join Republicans in a danse macabre of austerity, accepting mass unemployment as the new normal? Will Democrats support a deal that cuts Medicare, Medicaid and Social Security while lowering tax rates on the rich and corporations? Will they embrace an austerity that makes vital public investments impossible? We’ve just completed a money-drenched election, and many Democratic officeholders will be tempted to curry favor with the deep pockets once more. But no one should be misled. Obama doesn’t have to run for re-election—legislators do. Voters want Medicare and Social Security protected, not cut. They want jobs and growth, not deficit reduction at the price of higher unemployment. Politicians who embrace such a deal may reap the whirlwind.

The battle lines are being drawn. The AFL-CIO, SEIU and AFSCME have announced labor’s opposition to cuts in entitlement programs and to continued tax cuts for the rich. Groups representing the base of the Democratic Party—from African-Americans to Latinos, women and the young—are lining up around a four-point program calling for jobs first; protecting Medicare, Medicaid and Social Security; letting the top-end Bush tax cuts expire; and protecting programs for the vulnerable.

Reaching no deal is preferable to a bad one that cuts entitlements. Going over the so-called fiscal cliff is perilous, but probably preferable to a bargain under the terms currently in play. With no agreement, the Bush tax cuts would expire. In January the Senate would immediately push to revive the lower rates for everyone but the top 2 percent. Republicans could vote for tax cuts, but rates at the top would rise. The automatic spending cuts would not kick in immediately (although the stock market might feel the hit quickly). But the thing to remember about failure to reach a deal before January is that Medicare, Social Security and many programs for the most vulnerable are shielded from the cuts. And the new Congress would likely act rapidly to reverse the cuts to military and domestic spending. The already faltering recovery would surely weaken, threatening the loss of more jobs. But that might force Congress to address the real crisis—jobs and growth—rather than court a ruinous austerity.

Whatever the outcome, the battle is likely to be only the first skirmish of a defining struggle over the future of the Democratic Party and the progressive movement. We’ve just had what might be called the first of a new era of class-warfare elections. The plutocracy ran one of their own, on their agenda and with their money. The American people’s rejection of Mitt Romney, despite the lousy economy, demonstrated the declining appeal of the conservative, trickle-down agenda. The budget debate will draw battle lines within the Democratic Party, between the Wall Street–dominated New Democratic wing and the progressive wing fighting for the change this country desperately needs.

We are headed into a new era of upheaval. Our money-soaked politics may suffocate growing demands for change. But if Democratic legislators join the president in a grand betrayal, they may witness a powerful Tea Party movement from the left, as Republican legislators have from the right.

Robert L. Borosage is president of the Institute for America’s Future and co-director of its sister organization, the Campaign for America’s Future.
This article is available from The Nation.