Reports from the Economic Front

a blog by Marty Hart-Landsberg

Another Look At AmericaSpeaks and Deficit Politics

In a past post I discussed AmericaSpeaks, a political intervention by right-wing forces designed to promote fear of the national deficit as the greatest threat to our economic future and solutions weighted toward sharp cuts in social programs.

It appears that the organizers were not as successful as they no doubt had hoped they would be.  Despite being bombarded with material designed to scare and options designed to limit choices, majorities rightly held their ground and refused to be stampeded into endorsing socially destructive austerity policies.

For example, rather than supporting significant cuts in Social Security (which is self-financed and should not even have been part of the discussion), Medicare, and Medicaid, the overwhelming consensus of participants was that the deficit should be handled by:

•    Raising tax rates on corporate income and those earning more than $1 million.
•    Reducing military spending by 10 to 15 percent,
•    Creating a carbon tax and a securities-transaction tax.

Not a bad starting point.  On the other hand it remains to be seen how the organizers of AmericaSpeaks will report the results to the national deficit commission.

Some people have defended AmericaSpeaks on the grounds that the process was at least educational for participants.  On the face of it, a sustained discussion of government policies and their connection to the economy should be beneficial.

However, a poll of participants from four sites (Pasadena, CA; Augusta, ME; Chicago, IL; and Portland, OR) taken by the Center for Economic and Policy Research “revealed a surprising lack of knowledge among people who had just sat through a 6.5 hour-long discussion of the budget.

The gaps are clearly in line with the biases of the organizers, or at least the major funders.  For example, the poll revealed that few people had any sense of the origins or timing of our current large deficits.  This lack of knowledge tends to reinforce popular perceptions, encouraged by the media, that out-of-control government spending is the main culprit rather than structural problems in our economic system.

In reality, as James Galbraith pointed out:

Overwhelmingly, the present deficits are caused by the financial crisis. The financial crisis, the fall in asset (especially housing) values, and withdrawal of bank lending to business and households has meant a sharp decline in economic activity, and therefore a sharp decrease in tax revenues and an increase in automatic payments for unemployment insurance and the like. According to a new IMF staff analysis, fully half of the large increase in budget deficits in major economies around the world is due to collapsing tax revenues, and a further large share to low (often negative) growth in relation to interest payments on existing debt. Less than ten percent is due to increased discretionary public expenditure, as in stimulus packages.

The poll also revealed that a minority of people were aware of the stability of our social security system.  According to the CEPR:

Only 31.1 percent correctly answered that the program could pay benefits for more than 25 years even if no changes are made. 23 percent thought that the program would first run short of money in less than 15 years. (The Social Security trustees project that the program will be able to pay all scheduled benefits for the next 27 years while CBO projects it can pay all benefits for the next 33 years.)

In addition, few people understood the basic assumptions underlying the Congressional Budget Office forecasts that are used to generate the estimates that are taken as proof of our debt crisis.  For example, these forecasts assume that our economy will rapidly recover over the next five years, generating sustained growth in production and employment.  And, without any structural changes.  Hmmm.

They also assume that we will have low inflation and high short term interest rates.  This combination is critical in creating the debt crisis (defined by a high debt-to-GDP ratio) because it ensures that current dollar GDP will grow relatively slowly (because prices will remain low) while interest payments on the national debt will soar (because interest rates will remain high).  However, if we make assume that low inflation is associated with low interest rates or high interest rates are associated with high rates of inflation—more likely associations–the, the debt/GDP ratio will fall significantly and the national debt crisis will disappear.  As it is, the CBO is forecasting interest payments on the debt rising to over 20 percent of GDP by mid-century. This would be equivalent to “new federal spending similar in scale to the mobilization for World War II”—something that is just not on the horizon.

As the CEPR concludes:

This lack of knowledge on key issues raises questions about the usefulness of the exercise. It is striking that people would have such a long period of time to devote to learning about and discussing the country’s budget and economic problems and yet were still seriously misinformed on several key issues. It appears that this effort was not very successful in educating the participants.

All that said, if you are dying to roll up your sleeves and take part in the deficit cutting process, let me recommend the CEPR debt calculator.  It provides excellent information about our current programs and how various policies would affect the debt burden in 2020 (which was the target year for AmericaSpeaks).

To access the calculator (illustrated below) click here.


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One response to “Another Look At AmericaSpeaks and Deficit Politics

  1. OregonGuy July 20, 2010 at 5:53 pm

    Professor,
    Thank you for the posts.
    Popular support would make it easier for Peterson and his allies, but it is not essential. The battle lies ahead.

    Like

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