Budget Bedlam: Common Sense in the Madhouse

Washington is careening off the fiscal cliff smack into the debt ceiling. These mind-numbing mixed metaphors are not the currency of a well-governed nation.

Once more, Washington is fixated on what and how to cut. Once more, the media is clamoring for a deal, for “shared sacrifice.” Once more, Republicans have indicated that they are prepared to hold the full faith and credit of the United States hostage to exact deep cuts in spending, with Social Security, Medicare and Medicaid their primary targets. Once more, the president has indicated that he wants more deficit reduction, with a “balanced” program mixing spending cuts with tax hikes.

“Our government, “ wrote Supreme Court Justice Louis Brandeis, “is the potent, the omnipresent teacher.” But in Washington’s budget bedlam, reason gets lost in the din. As we hurdle the sequester while bouncing off the debt ceiling, it’s worth remembering some basic common sense about where we are.

1. The economy is still broken

More than 20 million people are still in need of full-time work. Wages are falling. Family wealth – largely the values of their homes – has been decimated. The middle class is sinking. Trade deficits are over $1 billion a day. Corporate profits are setting records as percentage of economy; wages are at new lows. Inequality is at record extremes. Catastrophic climate change is already wreaking havoc. This economy does not work for working people.

2. You can’t “fix the debt” without fixing the economy

The furious debates and painfully exacted deals on cuts and taxes will be washed away if the economy goes back into recession. More workers will be thrown out of work. More families will lose their homes. More children will go hungry. Tax revenues will fall; spending will soar on unemployment and food stamps and other supports for those thrown out of work.

Despite the Bush tax cuts, two unfunded wars, and the unfunded prescription drug company rip-off program, the annual deficit was less than 2 percent of gross domestic product in 2007 and the accumulated national debt was under 40 percent of GDP . Then Wall Street’s excesses blew up the economy, exploding the housing bubble, and created a recession with mass unemployment, driving us into trillion-dollar deficits that will end up more than doubling the debt burden.

If the economy is fixed, deficits and the debt burden will decline. The best and necessary deficit reduction program is to put people to work. In fact, even the modest growth we’ve witnessed since 2009 has reduced the deficit by about 25 percent relative to the size of the economy, declining faster than any time since the demobilization after World War II. Jobs and growth are essential to any deficit reduction agenda. The worst thing we can do is to endanger growth

3. You can’t fix the economy by “fixing the debt”

And threatening the faltering recovery is what Washington is doing. You can’t cut your way to prosperity. Austerity – spending cuts and tax hikes – costs jobs, slows growth and threatens a return to recession that will explode deficits. Austerity has helped to drive Great Britain and the European Union back into recession. It would be ruinous to repeat that experiment here.

Virtually unanimous bipartisan agreement on this reality drove the frenzy to avoid going over the infamous “fiscal cliff,” the spending cuts and tax hikes piled up by Washington to scare itself into action.

The fiscal cliff melodrama added $600 billion in taxes over 10 years, including a 2 percent tax hike on working Americans with the expiration of the payroll tax holiday. That will likely slow growth by nearly 2 percent of GDP and cost about a million jobs. It comes on top of the $1.5 trillion in spending cuts imposed in the last debt-ceiling debacle. These also are costing jobs and dragging down a weak recovery. Now Washington is descending mindlessly into another hostage crisis about more cuts without apparent concern for the economic effects.

4. You can’t “recover” to the old economy

This economy wasn’t working for working people before the Great Recession. The middle class was sinking; the richest 1 percent captured two-thirds of the rewards of growth. Families stayed afloat by taking on more debt. Good jobs were being shipped abroad. We can’t go back to the old economy that was built on bubbles and debt, and we shouldn’t want to. But a slow growth recovery won’t address these challenges. More cuts in spending or token stimulus won’t help.

5. You can’t build by focusing on what to dismantle

We need fundamental reform, a new strategy for the economy that will rebuild the middle class. That involves far different questions than what programs to cut and whose taxes to hike.

A new strategy must address the real challenges we face and the opportunities we have. Low interest rates give us an historic opportunity to launch a 10-year program to rebuild America’s decrepit infrastructure, from sewers to the electric grid, and modernize it to meet the challenge of catastrophic climate change. The global consensus against extreme trade imbalances provides the opportunity for a new strategy in the global economy that will expand but balance our trade, and make things in America once more. With sensible policy, America’s capacity for innovation provides us the opportunity to lead rather than lag in the green industrial revolution that is sweeping the world.

To revive the middle class, we need to empower workers to gain a fair share of the profits they help generate, lift the minimum wage and curb perverse CEO compensation packages. To provide our children with a world-class education, we have to invest in the basics, from pre-kindergarten to affordable college. Financial constraints should force a cutback of our commitments to police the world. These and many other needed reforms will require new investments, progressive tax reforms and new priorities. But simply cutting spending or raising taxes to reduce deficits won’t get it done.

6. Washington needs more Hippocrates and less hypocrisy.

In the short term, the president and Congress should first do no harm. Call a halt to this inane hostage-taking. Repeal the sequester – the automatic spending cuts designed as a time bomb to force action. Amend the debt ceiling to rise automatically to meet congressional obligations unless the Congress acts affirmatively to renege on what it has voted. Stop laying waste until we get a good sense of whether the faltering recovery can withstand the cuts and tax hikes already passed. Americans are sensibly turned off by the farcical Washington face-offs. And they will be rightfully furious if the folly drives the economy back into recession.

7. Focus on the predators, not the prey

As part of focusing on real reforms, Congress should address the sole source of the deficit projections that are used to terrify everyone. Instead of chopping away at the pillars of family security – Social Security, Medicare and Medicaid – fix our broken health care system. If we spent per capita what other industrialized countries spend on health care (while getting better public health results), we would right now be projecting surpluses as far as the eye can see. The good news is that costs haven’t been rising as fast as expected. Understanding how to build on what is working is a sensible next step. For savings, take on the culprits -- the powerful drug and insurance company lobbies, the private hospital complexes that profit from driving our health care costs up.

In any case, “shared sacrifice” is for suckers. It is neither just nor sensible to demand sacrifices be shared by the predator and the prey. It doesn’t make sense to ask everyone to sacrifice when the top 1 percent has captured 93 percent of the country’s income growth as it did in 2010. It makes no sense to cut spending on everything when long-term deficits are driven by one thing – our broken health care system. And it makes no sense to cut everything without being clear about what we need to build.

At the end of World War II, our debt burden was about 125 percent of GDP – far higher than it is now. Yet our leaders were focused on how to put the GIs back to work and avoid a return to the Depression. So they enacted the GI bill to educate a generation. They subsidized housing and built the suburbs. They converted wartime industries to peacetime development. They launched the Marshall Plan to rebuild Europe and create markets. They built the interstate highway system to pave way for a national market. They fought over deficits and budgets, but they did what needed to be done. And they built the first broad middle class in the world’s history that made America exceptional.