Tuesday, February 15, 2011

How to Talk About Deficits (and How Not To)

As I've noted on many occasions, there is a fallacious and deceptive argument that always surfaces when the powers that be need to legitimate deep cuts to working class living standards (such as those being proposed by Obama at present). This argument is what I've called "budget cut fatalism".

But, given that this line of reasoning is a complete distortion, what is a more accurate way of discussing budget crises and deficits?

First, we must ask: why is there a deficit? This requires that we ask how the budget works in the first place. As everyone knows, budgets consist of two components: revenues and expenditures. Depending on the context, the immediate "cause" of a deficit could either be a steep increase in spending or a steep drop in revenue. In our case, as everyone knows, the primary cause was a sharp drop in revenue.

Next, we ask: why was there a sharp drop in revenue? The answer is obvious: because our economy (and most other capitalist economies around the world) are experiencing the worst crisis since the Great Depression. This has caused revenues to decline sharply, eroding the funding for many of the basic social institutions that make up our society.

But, who is responsible for this crisis? One thing is for sure: the culprit isn't social expenditure. The obvious answer to who's responsible is: the "too big to fail" banks and financial institutions that plunged the global economy into crisis by hitching economic growth to various ponzi-like asset bubbles, of which the housing crisis is the most visible and important. A more succinct answer to the question of "why are we in a crisis?", however, would be as follows. Capitalism is a rotten, crisis-prone system.

So let us take stock of what's been said so far. First of all, the deficit is not the result of "out of control spending", it is quite obviously the result of a sharp decline in revenues. Second, the sharp decline in revenues was brought about by the global economic crisis. Third, the crisis was fomented by those who run our economy, namely the class of persons who own and control the commanding heights of the economy. They are responsible for the crisis and the deficit, (and for all the social misery it has unleashed).

Looked at in this sober light, the question of "what is to be done?" is an easy one to answer: let those who made the mess pay to clean it up. In other words, "chop from the top". A 2% windfall tax on the record profits earned last quarter would be enough to obviate the need for all austerity measures.

Note that this is precisely the opposite of what Obama has done so far. He has done more than simply propose punishing cuts to the living standards of the vast majority of Americans. He has done more than simply refused to chop from the top... he has in fact made it his priority to give the top even more by embracing the Bush tax cuts for the rich. And his "deficit commission" has recommended even more gifts to the rich: a further reduction in the top marginal tax rate, a reduction in the rate of corporate taxation, etc. The argument that such obscenely low levels of taxation for the rich are needed for "economic growth" is just plain false. The longest, most robust period of economic growth in American history saw top marginal tax rates as high as 90%, even under Republican presidencies such as Eisenhower.

What's happening is simply a narrow exertion of class power. The few are throwing the many under the bus. And its a double-whammy: first, we had to pay to bailout the banks and transfer toxic assets from corporate rolls to public ones... and now we have to pay for the deficits caused by the bank crisis (and the bailout) by taking sharp hits in our standard of living. First we are forced to shell out billions of taxpayer money to underwrite a restoration of profitability for the financial elite. Now we are forced to close schools, cut health-care, slash Pell Grants, shut down libraries, cut public transportation, layoff public workers, etc. all in order to pay for a crisis we didn't even have the chance to cause, given our powerlessness to impact the decisions made by those who own and control the commanding heights of the economy.

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