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PORTSIDE  August 2010, Week 2

PORTSIDE August 2010, Week 2

Subject:

James K. Galbraith Champions The Beast Manifesto

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Sun, 8 Aug 2010 17:46:33 -0400

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James K. Galbraith Champions The Beast Manifesto
by James K. Galbraith 
The Daily Beast
August 2, 2010
http://www.thedailybeast.com/blogs-and-stories/2010-08-02/james-k-galbraith-calls-for-expanding-entitlement-programs/

Don't be fooled by hawks who warn of a "long-term
deficit crisis," says the celebrated economist-expanding
entitlement programs will save money and free up jobs
for those who really need them: young people. Plus, read
the manifesto here.
[moderator: link to manifesto is here -
http://www.thedailybeast.com/blogs-and-stories/2010-07-19/save-the-economy-a-manifesto-by-harry-evans-joseph-stiglitz-alan-blinder-and-other-leaders/]

In the Great Crisis, the United States lost about eight
million private jobs. The unemployment rate rose above
ten percent. And the ratio of employment to population
fell almost five percentage points. Very few lost jobs
have been replaced: private employment has risen only
about a million since the worst days. In the public
sector the effect of the American Recovery and
Reinvestment Act was only to offset large layoffs being
made by state and local governments, so public
employment has hardly risen at all.

Two million of the lost jobs are in construction, which
faces a long slump. Three million were lost in
manufacturing, which is down 40 percent since 2000, and
those jobs likely won't ever return. Unemployment rates
for Black, Asian, and Latino workers have all doubled.
The average duration of unemployment has risen to an
astonishing 35 weeks, with nearly half of all unemployed
out of work for almost a year.

While seers from Wall Street proclaim a "deficit
crisis," obviously the capital markets don't take that
talk seriously.

So: Jobs are Priority One. But very little is being
done. And what little is done is hotly contested. Even
extending unemployment insurance proved difficult-and
UI, while necessary, is not a jobs program.

Sir Harold Evans and the economists who signed his
letter thus rightly argued for stronger action-action
that would increase public budget deficits now. That
action could include jobs programs, it could include
revenue sharing for states and localities, it could
include a national infrastructure/energy/climate bank,
and it could include tax cuts to boost the spending
power of private households.

But as this debate gets going, there are two traps. The
first is the idea that we need another "stimulus
package." How I hate that phrase! The message it
conveys-of something fast, temporary, quickly withdrawn-
is wrong. We're not in an ordinary postwar recession.
We've suffered a major collapse of the financial system.
Repairing this, and working off household debt loads and
the housing glut, will take years. Yes, the economy can
recover without strong private credit, but the recovery
will be slow and unemployment will not be cured.

The second trap is the idea that we should undo it all
later on. Even worse, many argue that we must make cuts
today, effective at a later time, to offset the
"stimulus." Since the major programs which are
authorized today for later effect are Social Security
and Medicare, this translates to "cutting entitlements"
in order to bring "long-term budget deficits under
control."

This is a pernicious idea, with two major foundations.
One is the simple political appeal of a balanced
argument-the same as Obama's decision to stay in
Afghanistan while leaving Iraq. It's nice to have things
both ways, to be for stimulus now and austerity later.
The problems come, in war and economics, when you have
to deal with the consequences, for real people, of
actions taken largely for rhetorical effect.

The second foundation of the "long-term deficit crisis"
argument is the work of the Congressional Budget Office.
CBO creates its long-term deficit projections with a
bizarre two-step operation. First, it wipes out the
deficits caused by unemployment, simply by assuming that
high unemployment will go away soon. And then CBO
recreates the projected deficit by assuming (a)
continued rapidly rising health care costs, and (b) much
higher interest rates, while (c) overall inflation
remains extremely low.

These assumptions are a mess. They are implausible and
internally inconsistent. I know of no economist who
defends them on their merits. They are accepted only
because most people have never looked at them
critically, and because they are politically convenient
to some. But in the real world, you cannot make good
policy on the basis of forecasts as bad as these.

In the real world, unemployment isn't going to go away
soon. And the only risk of fighting it too vigorously
now is that there might be some more inflation or a
decline in the value of the dollar much later on. Except
for energy prices, these risks are very, very remote.
World inflation disappeared 30 years ago with the
collapse of union power, global commodity gluts, and the
rise of low-wage manufacturing in (especially) China.
The dollar is, in fact, too strong right now, because of
the problems in Europe. And while energy prices are a
risk, the way you deal with that is with an energy
policy, not by deficit-cutting.

While seers from Wall Street proclaim a "deficit
crisis," obviously the capital markets don't take that
talk seriously. If they did, they wouldn't be willing to
lend to Uncle Sam for thirty years at four percent! But
in fact they are doing this every week. Yes, long-term
interest rates could change, but supposedly everything
we need to know about future deficits is known right
now. There simply is no funding problem for the U.S.
government, and in the real world of financial markets,
none is foreseen.

So what are the real effects of cutting Social Security
and Medicare?

Medicare pays doctors' bills for the old. It pays out at
lower rates than does private insurance for working
people. Cutting Medicare would mean two things: less
health care for the elderly, and therefore more
financial stress on their families. And more health care
costs overall, as people substitute with private
insurance for the public cuts. Both of these are very
bad ideas.

Social Security pays to keep working people (and their
dependents and survivors) out of poverty when they are
old. It spreads its benefits to all who have worked,
whether they have children who would otherwise support
them or not. The payroll tax spreads the burden to all
working people, whether they would otherwise be
supporting elderly parents or not. Both of these
transfers are fair, modest, and sustainable. Cutting
Social Security would simply create more poor elderly-
those who could not turn to their children-and more
stressed working families-those with parents in need.
Both of these are very also bad ideas.

In fact, the right response to the crisis is to expand,
not cut, both Social Security and Medicare.

The reality is, we are never going to make up good new
jobs for everyone who has been hit. (I'd love to be the
next Harry-Hopkins-and-Harold-Ickes-combined, but I'm
not going to get the job.) So let's face reality, and
make some tough decisions about who we want to be
jobless: the relatively old or the very young. Seen this
way, it's an easy choice.

There are many older workers who've already worked hard
jobs for many years. They would love to retire. But they
don't, because early retirement on Social Security is
very costly: you lose benefits every month over your
entire future life, unless you hang on to the regular
retirement age. We should give these people a break, and
lower, not raise, the full-benefit Social Security
retirement age-say, to 62 for the next three years. This
would give millions a chance to get out, if they want
to.

Similarly for Medicare. There are many older workers who
have health needs, and who work on only because they
can't afford to lose their employer-based insurance. Let
them out! In the crisis, I proposed cutting the
Medicare-eligibility age to 55 (and the Senate almost
included this in the health care reform bill). It's
still a good idea, but something more moderate, such as
opening a three-year window for early exits, would be
better than nothing.

Encouraging early retirements would mean that young
people-just out of school, with fresh skills, good
health, and high energy-would get the jobs they need
now. They would not be stuck waiting, or spinning their
wheels in school, for years and years. Meanwhile, the
retirees, supported by Social Security and Medicare,
would provide a continuing stable support to total
demand, creating jobs for others as they get older.

This is the way the economy should work. When we have
older people, we must care for them, and the best way to
do that is to give them the resources to support
themselves. There is no "burden problem" as our economy
is plenty productive for the working population to
support the elderly in modest comfort, particularly if
we include some of our truly wealthy in the tax base.

Care for the elderly, energy, climate change, the Gulf
of Mexico catastrophe, our decayed infrastructure,
public health-these are real issues. Let's deal with
them. The "long-term budget deficit" is a phony problem,
ginned up by politicians, some economists, and the
historic enemies of Social Security and Medicare on Wall
Street. For God's sake, let's not sacrifice our most
successful social programs to the hysteria we're hearing
from them.

_____________________________________________

Portside aims to provide material of interest
to people on the left that will help them to
interpret the world and to change it.

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