FacebookTwitterGoogle+RedditEmail

White House Burning

by DEAN BAKER

I have enormous respect for Simon Johnson. I first recall seeing him one late evening on a Bill Moyers segment in the middle of the financial crisis. I couldn’t quite believe that the former chief economist of the International Monetary Fund was complaining about the oligarchs in the financial industry using their control of the U.S. government to bail out their bankrupt banks. This was more likely attributable to too much alcohol or too little sleep than anything that could really be happening in this world.

Remarkably, it turned out to be true. Ever since the beginning of the financial crisis, Johnson, along with his co-author James Kwak, has been a tireless proponent of financial reform. Their blog, Baseline Scenario, is an essential source for those following the debate over financial reform, as well as other issues. Their last book, 13 Bankers, is a great account of the growing concentration in the financial industry that left us with too-big-to-fail banks.

Given their heroic role in the financial reform debate, I am not anxious to criticize Johnson and Kwak’s new book, White House Burning. But there are some important areas of difference that deserve attention.

The basic thesis of White House Burning is that the country is on an unsustainable fiscal path. Unlike some of the Chicken Littles leading the budget debate, Johnson and Kwak are responsible in how they lay out the case. There is no nonsense about runaway government spending. They explicitly refute this story. Most categories of government spending, except defense, have remained constant or fallen as a share of GDP since the budget surplus days of the late 90s.

They also point out that the story of excessive entitlement spending is misleading. They note that Social Security benefits are relatively modest and badly needed given the lack of other forms of saving for retirement.

The culprit in the growth of entitlement spending is health care costs. Johnson and Kwak note that the U.S. already pays far more per person than do people in other wealthy countries and has little to show for this extra expense. This gap in spending is projected to rise hugely in the decades ahead, which leads to outsized growth in spending on Medicare, Medicaid and other government health programs.

Their remedies are mostly reasonable. There is no slashing of government spending, although I would not push the plan to raise the retirement age for Social Security. They propose increasing taxes on the wealthy, mostly through taking back the Bush tax cuts, raising the tax rate on capital gains to 28 percent, and limiting tax deductions.

While the solutions do not especially upset me, I do very much disagree with the diagnosis of the problem. The most immediate issue is that we have a fire at the moment in the form of too little demand leading to too much unemployment. This is wrecking the lives of millions of workers and their families.

Johnson and Kwak understand this and certainly do not argue for deficit reduction in the short-term, but their focus on a longer-term deficit problem can be distracting from the more urgent problem. Perhaps more importantly, their chain of causation can lead to false conclusions.

They note that the United States has been able to borrow from abroad very cheaply because developing countries have wanted to accumulate vast amounts of foreign reserves (i.e. dollars). The reason is to protect themselves from having to face the harsh conditions that were imposed on the East Asian countries by the IMF and U.S. Treasury following the East Asian financial crisis.

However, the logic here can be flipped. Because developing countries are buying up vast amounts of dollar assets, the United States is running a large trade deficit. The foreign purchases of U.S. Treasury bonds and other dollar assets raise the price of the dollar, making imports cheap in the United States and our exports expensive for people in other countries. This increases our imports and reduces our exports. In other words, our foreign lenders are not doing us a favor; they are driving our trade deficit.

The trade deficit leads to a huge gap in demand. This gap in demand can only be filled by a large budget deficit or a large deficit in private savings over investment, that is basic national income accounting. Before the crisis, the housing bubble filled the demand gap by leading to boom in residential construction and also by pushing household savings to zero as housing bubble wealth-driven consumption helped to spur economic growth.

No one can seriously want to see us return to that sort of growth path, which only leaves the option of budget-deficit-driven growth. In other words, until we reduce the value of the dollar enough to get our trade deficit down to more normal levels, we will need large budget deficits to sustain high levels of employment. Rather than being a problem, the budget deficit is a solution to a problem created elsewhere.

It is worth noting that a deficit, even if run in a time of slack demand, does run a risk of leading to substantial interest burdens in future years. One way around this problem would be to have the Fed simply hold large amounts of debt indefinitely. (It currently has close to $3 trillion in assets.) The interest on the debt held by the Fed is simply refunded to the Treasury, leading to no net increase in the deficit. In order to limit any potential inflationary effects from this increase in reserves in the system when the economy picks up, the Fed could raise reserve requirements as China’s central bank has been doing.

The other key area where Johnson and Kwak misdirect readers is health care costs. At the end of the day, we cannot afford to pay for a broken health care system. This is not just an issue of public finances. We can’t have a health care system that costs 25-30 percent of GDP when everyone else gets comparable or better outcomes spending 10 percent of GDP.

The projected run-up in private sector health care costs is every bit as much a cause for concern as the projected increase on the public side of the ledger. Exorbitant health care costs were major factors in the bankruptcy of GM and Chrysler. More people will inevitably find care unaffordable if we see the projected trend of cost growth. Rather than finding ways to pay for the publicly incurred costs of a broken health care system, we have to find ways to fix the system. (Trade may be a good place to start.)

In short, this country faces real fires – a huge unemployment problem, an unsustainable trade deficit, and a broken health care system – but these are not the fires at which this book aims its hose. The result is a seriously misdirected effort.

Dean Baker is the co-director of the Center for Economic and Policy Research (CEPR). He is the author of Plunder and Blunder: The Rise and Fall of the Bubble Economy and False Profits: Recoverying From the Bubble Economy.

This article originally appeared on Huffington Post.

Dean Baker is a macroeconomist and co-director of the Center for Economic and Policy Research in Washington, DC. He previously worked as a senior economist at the Economic Policy Institute and an assistant professor at Bucknell University.

More articles by:
Weekend Edition
July 22, 2016
Friday - Sunday
Jeffrey St. Clair
Good as Goldman: Hillary and Wall Street
Joseph E. Lowndes
From Silent Majority to White-Hot Rage: Observations from Cleveland
Paul Street
Political Correctness: Handle with Care
Richard Moser
Actions Express Priorities: 40 Years of Failed Lesser Evil Voting
Eric Draitser
Hillary and Tim Kaine: a Match Made on Wall Street
Conn Hallinan
The Big Boom: Nukes And NATO
Ron Jacobs
Exacerbate the Split in the Ruling Class
Jill Stein
After US Airstrikes Kill 73 in Syria, It’s Time to End Military Assaults that Breed Terrorism
Jack Rasmus
Trump, Trade and Working Class Discontent
John Feffer
Could a Military Coup Happen Here?
Jeffrey St. Clair
Late Night, Wine-Soaked Thoughts on Trump’s Jeremiad
Andrew Levine
Vice Presidents: What Are They Good For?
Michael Lukas
Law, Order, and the Disciplining of Black Bodies at the Republican National Convention
Victor Grossman
Horror News, This Time From Munich
Margaret Kimberley
Gavin Long’s Last Words
Mark Weisbrot
Confidence and the Degradation of Brazil
Brian Cloughley
Boris Johnson: Britain’s Lying Buffoon
Lawrence Reichard
A Global Crossroad
Kevin Schwartz
Beyond 28 Pages: Saudi Arabia and the West
Charles Pierson
The Courage of Kalyn Chapman James
Michael Brenner
Terrorism Redux
Bruce Lerro
Being Inconvenienced While Minding My Own Business: Liberals and the Social Contract Theory of Violence
Mark Dunbar
The Politics of Jeremy Corbyn
David Swanson
Top 10 Reasons Why It’s Just Fine for U.S. to Blow Up Children
Binoy Kampmark
Laura Ingraham and Trumpism
Uri Avnery
The Great Rift
Nicholas Buccola
What’s the Matter with What Ted Said?
Aidan O'Brien
Thank Allah for Western Democracy, Despondency and Defeat
Joseph Natoli
The Politics of Crazy and Stupid
Sher Ali Khan
Empirocracy
Nauman Sadiq
A House Divided: Turkey’s Failed Coup Plot
Franklin Lamb
A Roadmap for Lebanon to Grant Civil Rights for Palestinian Refugees in Lebanon
Colin Todhunter
Power and the Bomb: Conducting International Relations with the Threat of Mass Murder
Michael Barker
UK Labour’s Rightwing Select Corporate Lobbyist to Oppose Jeremy Corbyn
Graham Peebles
Brexit, Trump and Lots of Anger
Anhvinh Doanvo
Civilian Deaths, Iraq, Syria, ISIS and Drones
Christopher Brauchli
Kansas and the Phantom Voters
Peter Lee
Gavin Long’s Manifesto and the Politics of “Terrorism”
Missy Comley Beattie
An Alarmingly Ignorant Fuck
Robert Koehler
Volatile America
Adam Vogal
Why Black Lives Matter To Me
Raouf Halaby
It Is Not Plagiarism, Y’all
Rev. Jeff Hood
Deliver Us From Babel
Frances Madeson
Juvenile Life Without Parole, Captured in ‘Natural Life’
Charles R. Larson
Review: Han Kang’s “The Vegetarian”
FacebookTwitterGoogle+RedditEmail