Home > Political Economy > Round Two

Round Two

from Peter Radford

The problem with caving in to a blackmailer is that they are inevitably emboldened to try again. Usually the second extortion effort raises the stakes for both sides. This is where we are with the budget. Obama caved in last week in order to keep the government functioning. In the process he acquiesced to a long litany of right wing demands. The cuts agreed to include all sorts of completely irrelevant attacks on various aspects of long standing social programs. The Republicans littered the proposal with cuts that are minor in dollar terms, but hugely significant to their culturally extreme voter base. So the lunatics won round one. They are now back for more. 

The start to round two was signaled yesterday when the Republican leadership announced that it will allow the US to hit its debt ceiling. This is expected to happen sometime in mid-May. After that deficit spending will have to be met either by cutting spending, as the Republicans expect and hope, or simply by printing the money needed – i.e. not through borrowing, an approach I have yet to see endorsed by anyone in our elite on either side of the ideological divide.

This will get ugly. Really ugly.

Let’s all acknowledge the serious nature of what is about to go on. The right has set the game up for themselves: this debate is one they precipitated by deliberately defunding the federal budget by cutting taxes back in 2001 and 2003. They undermined our fiscal stability by enacting tax cuts that deprived Washington of money. At the same time they enacted big increases in government spending. They were the very epitome of recklessness. Yet the voters still perceive them as conservative. The left has failed miserably by not being able to persuade voters of the enormous risks associated with those tax cuts. If – a big if – we are on the road to ruin it is because of Republican fiscal strategies, not purely because of unaffordable programs.

Consequently, we are now discussing what America will look like for the next fifty years. Will there be one America with a solid middle class and relatively less inequality? Or will there be two Americas with the current sharp divide widened further? A top one percent, and then the rest? Please keep this in mind as we debate what to do.

The greatest feature of our economy over the last thirty years has been the systematic attack on democracy by the wealthy. They have used every trick to undermine equality. They have accumulated unprecedented power and wealth by emphasizing notions of freedom and individualism that resonate well with voters, but play to the hand of only the strong. That is to say the wealthy themselves.

The long term failure of the American economy to maintain its post-war growth path opened the door to the revival of these and other anti-social ideas. They took strongest root in the aftermath of the 1970′s stagflation when the wealthy were abetted by zealous and ideologically motivated economists who wanted to overthrow Keynesianism. They subsequently infected business with shareholder value strategies that shortened investment horizons and undermined competitiveness. They fueled the great cost cutting and offshoring movement of the past three decades. They encouraged the steady decline of all forms of collective action to protect the weaker elements of society. They encouraged absurd risk taking in finance. They undermined social programs aimed at lifting the poor. They reduced taxes for themselves. They resisted shareholder control of management. They set up interlocking boards of directors so that like minded people sat in judgement of CEO’s. They neutered all criticism. And they homogenized the world view of our media and elite so that there is no alternative taught in “respectable” or “serious” schools nor reported in the mainstream press.

In short they took power and then censored and gutted or suborned the opposition.

Most of this long list has happened in the past thirty years. Cumulatively the effect has been astonishing. America is now the most divided nation in the industrial world. More so than it has been for a very long time. And it is arguably the least stable because its democracy has been subverted.

In short America was taken over, silently and effectively, by a very small group who now runs the place for its own benefit.

But even the very rich cannot pull off a coup of this sweeping nature without accomplices. This was the cause of the uneasy alliance the wealthy struck with the populist wing of the Republican party. A wing that grew in power in the aftermath of the contests over desegregation and women’s rights. It is easy to forget just how much hatred was stirred to the surface by the prolonged debate over the Civil Rights Act. It’s echo is in today’s right wing disgust at Obama’s very presence in the White House and the pervasive doubt, within the extremist camp, of his place of birth. The alliance is structured this way: the rich want to rent seek and amass wealth. The populist/libertarians want to roll the clock back to a past era where government didn’t interfere. And by interfere the more extremist Republicans mean the government should no be able to limit their ability to discriminate.

Yes, this fight is that basic.

Yes, it is that venal.

Yes, America is that divided.

And, no, some people have never forgiven government for ending discrimination. For them it was an intrusion into their liberty.

It was, I think, Amartya Sen who said that there are no famines in democracies. The great fight over establishing the safety nets in the industrialized nations was a reflection of this effect of democracy. Voters look after themselves. Sooner or later they will force politicians to make sure that most people are safe from economic disaster. This is why democracy is in opposition to capitalism. The one spreads the wealth. The other concentrates it.

That we, in America, have so weak a safety net, and that we have so many people without health care coverage is testimony, by extension of Sen’s observation, to the weakness of our democracy. Money talks in our politics. The agenda is set by the wealthy. The majority have to accept what little they can get.

It is this pernicious context that now puts a boundary around what is, and what is not acceptable in the debate over the deficit. Our elite assumes the deficit is an existential problem for the nation because it is an existential problem for them. So they have forced us into this discussion. And the libertarians are along for the ride. It is the rentier class who would lose from inflation – which erodes the value of debts – so the Fed watches inflation like a hawk and ignores, relatively, unemployment. This is also why financiers warn about credit markets and debt levels: their assets are at stake, so they force us to act against our own interests in favor of theirs.

In his speech today, Obama presented his view of how to deal with the deficit. He told us that no sensible solution can avoid raising revenues. That means increasing taxes and broadening the tax base by eliminating the plethora of avoidance schemes and loopholes that reduce it. So he proposes allowing the Bush tax increases to go into effect for the top tier of income earners. Also, it is important that any cutting extends to include offense spending. The Pentagon’s long term burden on our budget is unsustainable. It needs reduction. Obama agrees.

The big nut, however remains health care, which means Medicare. The Republicans have done us all a favor by admitting publicly that they want to eliminate Medicare. That was the thrust of the ridiculous plan presented by Paul Ryan last week, and which was vividly attacked by Obama today. The voucher scheme proposed by Ryan is designed to move the burden of health care costs onto the elderly. This effect results from the way in which the voucher’s value would rise independently of, and slower than, health care costs. So a gap would open up that would have to be filled by the elderly themselves. Or, of course, they could forgo treatment. This attack on Medicare opens space for the Democrats to respond to the voter’s fondness for the program. Poll after poll suggests that voters do not want Medicare abolished. Indeed, and ironically, the most vehement opposition to cutting costs in Medicare comes from self-confessed Republican supporters.

One point to keep in mind is that the Republican voucher scheme does nothing to control health care costs themselves. It simply shifts the burden out of the government budget into private budgets. Obama, in contrast has attempted to roll back the steady rise in costs by pushing through his reform law last year and, today, by calling for the beefing up of oversight of Medicare spending and using its market power to force lower prescription costs.

Neither the Ryan plan nor the Obama plan will be passed into law of course They are merely the opening salvo in what promises to be a very hot and protracted war.

Which brings me back to my theme: this is a test of our democracy. If the wealthy win the debate, as they certainly did during the talks over finance reform, we should expect to continue towards a more divided nation. The stakes are high for the wealthy. They will spend a great deal to buy the necessary votes to force the burden of austerity onto the poor, elderly, and sick. Obama’s willingness, and ability, to lead the resistance is crucial. His speech today was encouraging. But his track record is worrisome. He talks a good game, but then negotiates badly. This time he needs to stare down the extremists. He cannot, he must not, he should not, give in to their extortion efforts again. If they want to use the debt ceiling as hostage, then let them. Let’s have the fight that they keep asking for. Make it clear who wants what. Then dig in.

Round two is all about the future of the middle class. It is beleaguered and in retreat. It is suspicious and confused. It is angry. It does not need pretty talk. Nor does it need to be betrayed by weakness in the face of the attack from the wealthy. It needs a strength Obama has so far failed to demonstrate. And it needs an articulation of why this fight is so important. In short, it needs leadership.

Perhaps even more than this: if we lose round two, the cause of democracy will be set back even further.

Inequality must end. The major portion of austerity should fall on those who led us down the fiscal path we have travelled. The responsibility is theirs. They should pay the cost for fixing the mess their policies caused.

Obama has set a partisan tone with his speech. He has set up the fight. Can he carry through?

I wonder.

  1. bvir
    April 14, 2011 at 12:46 pm

    > It needs a strength Obama has so far failed to demonstrate.
    >He has set up the fight. Can he carry through?

    For a view of why Obama does not actually care about the important issues you mention, and why no real help or pugnacity can be expected from him, see:


  2. April 14, 2011 at 3:29 pm

    >this debate is one they precipitated by deliberately defunding the federal budget by cutting taxes back in 2001 and 2003. They undermined our fiscal stability by enacting tax cuts that deprived Washington of money.

    Sorry. But this is typical deficit dove speak and only plays into the hands of all debt/deficit paranoids. Nobody can deprive the US government of money. The US government is the issuer of its money. By definition it can’t run out of it. Wanna have a proof? Just read the latest piece in Rolling Stone Magazine of Matt Taibbi about the collusion between Treasury and FED. We need some trillions to rescue our plutocrats? No problem. We mark up/down some numbers in the balance sheet of the FED and voila: some trillions US$ are served out.

  3. Jeff Z.
    April 14, 2011 at 5:16 pm

    The same way it can be created and funneled to defense contractors and wars that are not officially part of the budget.

    But the point is that most people do not think this way about money. Stephan is right that money can be created at the touch of a button in the offices of the Federal Reserve. But it is not about the “money”; it is more about the priorities. On that score, I think Radford is dead on. Most people do not think about money this way, so the rhetoric about debt is effective. Further, it is a difficult concept to get you head around because it is so different from the way people usually think about money. And then there is the additional difficulty of understanding the implications, which I confess I am still having some troubles with.

    While a national government has the right to print money, state and local governments in the U.S. do not. They CAN be deprived, or they CAN experience a surplus thanks largely to changes in economic growth, and this has tremendous quality of life implications. The Federal government could create the money and ‘erase’ state budget deficits if it wanted to, but that won’t happen. Again, it’s a question of priorities. Remember, government is inherently wasteful according to the Ryan crowd.

  4. April 14, 2011 at 6:24 pm

    @Jeff Z
    I had second thoughts on my comment to Peter while riding home. And I agree with you that Peter is dead on. So here’s the problem: The post of Peter or my comment needs the qualifier “The US federal government is revenue-constrained (it needs taxes to fund expenditure) [and sometimes not — defense spending, sweetheart deals, …] because it wishes so”. How much the government can deficit spend in one period is mostly only a question of political choice (or your priorities). From an economic perspective the deficit spending should not cross the inflation barrier. But with this output under-utilization and unemployment that is not exactly something to worry about in the US right now. So you are right. The whole debt/deficit brouhaha right now is about ideology and politics and not about economics. And the sad thing is: smart Republicans understand this (remember Dick Cheney: deficits don’t matter) and Democrats like Obama still live in a Bretton Woods world. PS (Peter): Can he carry through? Nope. This guy is addicted to harmony.

  5. April 15, 2011 at 3:52 am

    Sometimes things have to get much worse before enough people are motivated to push enough to make them better – note middle east today!!

    • Alice
      April 15, 2011 at 9:01 am

      Peter is spot on but so is Shirley. The US is so busy undoing what made it great. Its not Obama. Its the power of the wealthy that resides in republican ranks. Obama has a fight on his hands and I think he is doing his best and if he loses the US loses as a nation. Best to get to the losses fast so those the wealthy republican ranks of politicians who are hijacking democracy and ruining the entire nation can really be seen for the vile creatures they are.

  6. Alice
    April 15, 2011 at 9:02 am

    Antyway – just think of Mubarak and sons. They reside in jail now.

  7. Dave Taylor
    April 16, 2011 at 11:43 am

    @Alice: “The US is so busy undoing what made it great. Its not Obama. Its the power of the wealthy that resides in republican ranks.”

    I’m just re-reading a 1931 novel by war historian John Buchan, then British MP for the universities and from 1936-40 Governor-General of Canada, so no slouch. His warnings in “The Courts of the Morning” about what was happening to America in the 1930’s slump bear an uncanny resemblence to what is happening now.

    The point, Alice, is that those who are undoing America are not Americans so much as cosmopolitan megalomaniacs. “[T]he world today is stuffed with megalomania. Megalomania in politics, megalomania in business, megalomania in art – there are many kinds. You have the man who wants to be a dictator in his own country, you have the man who wants to corner a dozen great businesses and control the finance of half the world, you have the man who wants to break the historic rules of art and be a law unto himself. The motive is the same in every case – rootlessnes, an unbalanced consciousness of ability, and an overweening pride. They want to rule the world, but they do not see that by their methods they must first deprive the world of its soul, and that what would be left for their dictatorship would be an inanimate corpse”. In the story the stateless personification of this has for America “the unfaltering contempt which a trained athlete might have for a great, overgrown, noisy, slobbering untrained hobbledehoy. With America it is war to the death. .. You have seen for yourself how completely [the country he now governs] is in his power. He has made her Government rich and supine., and got it under his thumb. The thing is a miracle of tact and diplomacy. [Its] Ministers do not share in his secrets, they know very little of his schemes, but he has organised them as he wanted, and they do his bidding without question”. In the story “They call themselves the new Conquistadors – conquerors, you see, over all the old standards and decencies of human nature. … First of all they make money. They are the most efficient bagmen alive. For the rest, they break down things and loosen screws… Lincoln fought a great war to prevent democracy making a fool of itself. [Here, the strategist’s] object is just the opposite – he wants to encourage democracy to make a fool of itself, to inflate the bladder till it bursts. … His instruments? The press, for one thing. The politicians too … He believes that bad foreign trouble, which they couldn’t afford to neglect, would split the unweildy fabric. Democracy, of which America is the incoherent champion, would become a laughing-stock, and he and his kind would have the re-ordering of the fragments.”

    What actually then, happened, of course, was Nazi Germany. What is happening now is Iraq, and Afghanistan, and Libya.

    In the story Buchan had copper mines earning the money, but now it has become apparent that since 1694, wars and empires have been funded by international banks simply printing the money. The bank run by George Bush’s grandfather, I am told, financed the miraculous rise of the Nazi’s. Can telling these truths and local trading using local credit notes marginalise global banking and puppet governments?

    • Alice
      April 16, 2011 at 11:34 pm

      Dave – I couldnt agree more with this comment ““[T]he world today is stuffed with megalomania. Megalomania in politics, megalomania in business, megalomania in art – there are many kinds. You have the man who wants to be a dictator in his own country, you have the man who wants to corner a dozen great businesses and control the finance of half the world, you have the man who wants to break the historic rules of art and be a law unto himself.”

      The world today is also stuffed with dysfunction because of it. Dysfunction in politics. Dysfunction in business. Dysfunction in finance. Dysfunction in democracy.

      Telling these truths cannot, on their own, marginalise puppet governments but may help. Only the people can destroy puppet governments. I wonder whether the US government would protect its own citizens and speak up for the protection of its own democracy if US citizens ever took to the streets like the Egyptians or the Libyans?

      • Dave Taylor
        April 17, 2011 at 8:33 am

        @Alice: “Telling these truths cannot, on their own, marginalise puppet governments”.

        True, but I was trying to address the cause of the problem, not just point to the symptoms. Is the answer to the power of corrupt international finance to bypass it by creating our own local money and as far as possible spending it on local produce? Isn’t that in fact much what Keynes might have achieved (had it not been for the oil dollars scam) in his post-war system of currency controls?

        @Round Two (Peter’s finale): “Which brings me back to my theme: this is a test of our democracy. If the wealthy win the debate, as they certainly did during the talks over finance reform, we should expect to continue towards a more divided nation.”

  8. Dave Taylor
    April 17, 2011 at 9:06 am

    A somewhat more humorous PS. http://www.youtube.com/watch?v=QuxSl_4yLz4&NR=1 has a nice follow-up in which it becomes The Politicians Song, an apt commentary on our British political puppet show.

    • Alice
      April 17, 2011 at 9:21 am

      Yes, couldnt agree more. Its an apt clip Dave. The elections keep rolling and the people keep switching, and the economic health of the US keeps falling but we have people in power continuing to do nothing much at all….except spin, endless spin.

      I might suggest at this point, being an Australian, that the best thing the US could do for itself is to kick out that weasel ex Australian, now US citizen, Rupert Murdoch. From one man so much BS came to your shores (and we hate him too down here).

      Dyfunction is all I see.

  9. Dave Taylor
    April 17, 2011 at 11:13 am

    I’m a Brit, Alice, but I certainly agree about Murdoch. Here we are hoping the scandal over the News of the World phone hacking is going to make life difficult for him.

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