Remember Growth?

by MIKE WHITNEY

One thing you can say about Obama; he never fails to disappoint. Last night’s State of the Union Speech is a perfect example. In his typical lofty rhetoric, the president promised to continue to implement his regressive social and economic policies without pause provided his GOP counterparts lend a hand. Aside from his promises to slash popular social programs, Obama defended his controversial drone policy which is responsible for the deaths of hundreds of civilians in Afghanistan, Pakistan and Yemen. In thinly-veiled language, Obama stated, “Where necessary, through a range of capabilities, we will continue to take direct action against those terrorists who pose the gravest threat to Americans.” Predictably, the Rotunda exploded in applause as both Republican and Democrats expressed their approval for the president’s extra-legal assassination program. This is what passes as democracy in the US today.

Along with the standard blabber about the superiority of the United States, Obama reiterated the perfunctory lies about the budget deficits and his determination to slash public spending. Here’s a clip from the speech:

“Most of us agree that a plan to reduce the deficit must be part of our agenda…Over the last few years, both parties have worked together to reduce the deficit by more than $2.5 trillion – mostly through spending cuts, but also by raising tax rates on the wealthiest 1 percent of Americans. As a result, we are more than halfway towards the goal of $4 trillion in deficit reduction that economists say we need to stabilize our finances. Now we need to finish the job.”

Most of us “don’t” agree about the plan to reduce the deficit, but that’s not going to stop Obama from spearheading the attack on so-called “entitlements”, those meager stipends that keep the poor, the sick, and the elderly from destitution. Gutting the social safety net has become the rallying cry for the president’s second term in office.

Keep in mind, that the “we must cut the deficits” mantra is a fiction invoked by right-wingers to impose austerity on working people. It has no basis in fact. The reality is the deficits are already shrinking at their fastest pace since WW2. In fact, there’s a real danger that accelerating deficit reduction will hurl the economy back into recession. Here’s the story from Jed Graham at Investors Business Daily:

“The federal deficit has never fallen as fast as it’s falling now without a coincident recession….To be specific, CBO expects the deficit to shrink from 8.7% of GDP in fiscal 2011 to 5.3% in fiscal 2013 if the sequester takes effect and to 5.5% if it doesn’t. Either way, the two-year deficit reduction — equal to 3.4% of the economy if automatic budget cuts are triggered and 3.2% if not — would stand far above any other fiscal tightening since World War II.

Until the aftermath of the Great Recession, there were only three such periods in which the deficit shrank by a cumulative 2% of GDP or more. The 1960-61 and 1969-70 episodes both helped bring about a recession…That’s not to say that a recession is in the cards now…But growth is likely to be disappointingly weak yet again…

History suggests that there’s little good to be gotten from cutting the deficit much faster than 1% of GDP per year.” (“The Deficit Chart That Should Embarrass Budget Hawks”, Investors Business Daily)

And Graham isn’t alone in his analysis of deficit reduction. Economist Robert Reich is equally concerned. In a recent blog post, Reich blasted the GOP hawks for saying the budget deficit is “the transcendent issue of our time.” The former-Secretary of Labor calls this the “Republicans biggest lie”. Here’s more from the same post:

“Government deficits are not a problem. To the contrary, they’re now essential… The transcendent issue is jobs and wages. Cutting the budget deficit now will only result in higher unemployment, lower wages, and more suffering…

If Republicans paid attention they’d see how fast the deficit is already shrinking. It was 8.7 percent of the Gross Domestic Product in 2011. The Congressional Budget Office forecasts it will shrivel to 5.3 percent by the end of 2013 if we go over the fiscal cliff on March 1 — and some $85 billion is cut from this year’s federal budget. Even if March’s fiscal cliff is avoided, the CBO expects the deficit to shrink to 5.5 percent of the GDP, in light of deficit reduction already scheduled to occur.

This is not something to celebrate. It translates into a significant drop in demand, with nothing to pick up the slack.” (“The Biggest Republican Lie”, Robert Reich’s blog)

Reich confirms what we already know, that the deficits are retreating fast because more people are finding jobs which is increasing tax receipts. In other words, contrary to stone age economic theories of Barack H. Obama, the deficits are fixing themselves via growth. That means the focus should be on jobs to generate more revenue and put the economy back on track. Here’s more on the topic from the New York Times:

“The budget deficit in 2013 is expected to fall below $1 trillion for the first time in five years. Perhaps policy makers in Washington can now focus on the other $1 trillion deficit, one that gets next to no attention yet is much more threatening to the well-being of American families: our sluggish economic growth…

Growth this year will average only 1.4 percent, according to the budget office’s latest forecast. By the time we recover to our potential — which the C.B.O. expects will take until 2017 — the Great Recession set off by the implosion of the housing bubble more than five years ago will have cost us nearly half of one year’s entire economic production: about $7.5 trillion.

We will be paying the price for years. The slump is hindering capital investment, stunting the careers of college graduates and encouraging workers to drop out of the labor force, potentially blighting the economy over the long term. The C.B.O. expects unemployment to remain above 7.5 percent through next year.

And low growth is crimping government finances — reducing tax revenue while, at the same time, increasing the cost of programs like unemployment insurance. Last year, the budget office calculated that sluggish growth alone was responsible for more than a quarter of the budget deficit over the last four years.” (“In Shovels, a Remedy for Jobs and Growth“, New York Times)

Did you catch that part about “By the time we recover to our potential… the Great Recession… will have cost us …about $7.5 trillion”? What that means is that Obama’s lamebrain economic theories have reduced potential output by about half of our annual GDP, which is $15 trillion. Think of how many people we could have employed if the president had implemented traditional, tried-and-true Keynesian economic theories instead of the bonehead, fear-based, failed ideas of the same economists who–as Dean Baker notes– “completely missed the $8 trillion housing bubble (and) whose collapse sank the economy. There is no reason to believe that their understanding of the economy has improved in the last 5 or 6 years.”

Indeed, but that doesn’t seem to bother Obama who remains as committed to deficit reduction today as he was when he first took office in 2008. Perhaps, he should set aside his prejudices for a while and consider the observations of Janet Yellen, the Fed governor that many analysts have pegged as Ben Bernanke’s replacement when the Fed chairman steps down later in the year. Here’s what Yellen had to say in a recent speech in Washington DC at the the IMK Macroeconomic Policy Institute:

“Discretionary fiscal policy hasn’t been much of a tailwind during this recovery. In (fact)…discretionary fiscal policy this time has actually acted to restrain the recovery… At the federal level, policymakers have reduced purchases of goods and services, allowed stimulus-related spending to decline, and have put in place further policy actions to reduce deficits…”

In very subtle language, Yellen is scolding Obama for a goofy policy that has “acted to restrain the recovery” by allowing “stimulus-related spending to decline”. She even goes so far as to explicitly point out where the problem lies, that is, in Obama’s “policy actions to reduce deficits.”

It is rare to hear a respected member of the Fed excoriate a sitting president that sharply, but there you have it. A stupid policy invites criticism.

Booyah, Yellen.

MIKE WHITNEY lives in Washington state. He is a contributor to Hopeless: Barack Obama and the Politics of Illusion (AK Press). Hopeless is also available in a Kindle edition. He can be reached at fergiewhitney@msn.com.

MIKE WHITNEY lives in Washington state. He is a contributor to Hopeless: Barack Obama and the Politics of Illusion (AK Press). Hopeless is also available in a Kindle edition. He can be reached at fergiewhitney@msn.com.

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