The “sequester,” a Washington-made $85 billion package of brutal public spending cuts to hit the economy over the next few years, is expected to destroy nearly one million jobs and wreak havoc on working families and neighborhoods. This austerity tsunami comes on top of the calamities of the Great Recession and subsequent economic stagnation, also made possible by a political establishment and an economy largely unresponsive to the needs of the 99 percent. Adding it all together, the near-future outlook for working people is grim, especially for the most vulnerable. This is, of course, if we do not resist and fight back with all our passion and resources.
WORKERS WILL PAY FOR THIS
The crucial fact is that, one way or another, workers will pay for this. It is not whether, but how we will pay. Either with ruined hopes for us and our children, severe hardship endured in silence and shameful isolation, or with the focused and laborious effort required to overcome differences — real and imagined — and act in concert with our class sisters and brothers, turning ourselves into a fighting force, conceivably the most formidable in U.S. history, with an independent spiritual, civic, and political life, and driven by an unstoppable bent to snatch the economy and the political system off the grip of the 1 percent, reorganize them democratically, and make them serve our needs.
According to a recent poll, just over one third of Americans know what the “sequester” is. “Stimulus package,” “bank bailouts,” “quantitative easing,” “debt ceiling,” “fiscal cliff,” and the latest, “sequester”, are parading terms with confusing meanings. It is hard for workers, understandably alienated from economics and politics, busy with their own lives, to follow the latest artificial deadlock created by the politicians in Washington. However, understanding the ABCs of this crisis is indispensable for working people to organize an effective political response.
THE POLITICAL ECONOMY OF THE GREAT RECESSION
On the political surface, the “sequester” is the result of an ongoing dispute between a Democratic White House and Senate, and a Republican House of Representatives, over the ends and means of economic policy. To grasp the character and import of this dispute, we must see below the political surface. To begin, consider that the economy expands when two things happen in tandem. On the “supply side,” domestic businesses produce and market more goods. On the “demand side,” households buy additional consumption goods; businesses buy more plant and equipment to increase future production; the government spends more in the military, social insurance, business subsidies, education and other programs; and foreigners buy more from U.S. businesses than we add to our purchases abroad.
In this light, the Great Recession happened because, in an economy with a $15 trillion annual gross domestic product (GDP), the demand for domestic goods coming from businesses and private households dropped suddenly by over $1 trillion. Businesses (absorbing on average about 12 percent of GDP, although with much variation over short periods of time) pulled back, especially in construction and connected industries. A number of businesses shut down while the surviving companies sat on mounting piles of cash, refusing to put them to productive use. Reasonably so, since private businesses produce for sale and profit, the economy had imploded, and the prospects of a quick recovery dimmed in the face of Washington’s insufficient response.
Households (which tend to absorb around 70 percent of GDP) also recoiled, mainly because their wealth shrank as a result of the abrupt drop of housing values (previously inflated by rampant financial speculation), and then as a result of the economy’s downward spiral, which threw people into unemployment, underemployment, and bankruptcy. All of this further reduced household income and wealth. (For a significant portion of American working class households, their wealth is small or even negative.) Finally, as the U.S. tends to import more than it exports to the rest of the world, the net foreign absorption of domestic production has been negative since 1975, though insignificant as a proportion of GDP.
It should be transparent to everyone that the cause of the Great Recession was not some meteorite that destroyed one fifteenth of our productive wealth. Neither was it some mysterious disease disabling our workers and making them one fifteenth less productive. As an economy evolves and reconfigures itself – buffeted by technological change, demographic and cultural shifts, and global pressures – some mismatch between the skills of workers and the needs of industry is inevitable. Even with the economy at peak, tens to hundreds of thousands of people file for unemployment benefits in any given month, though in “good times” this is offset by job creation. Thus it is preposterous to argue that a chief cause of the Great Recession and the subsequent economic stagnation is some “structural” defect of our labor force. This is why “supply side” arguments about the causes of the Great Recession and ensuing depression, and therefore about the proper ways to turn things around (like the dubious panacea of retraining workers for “the jobs of the 21st century”) are nonsense.
The 2008 election of Barack Obama led many of us to hope for an aggressive response to the economic crisis, mostly by increased government spending, ending the wars, re-regulating banking, and taxing the 1 percent. Instead, the White House and the Federal Reserve moved quickly to rescue the banks, leaving working people – those unemployed, with underwater mortgages, or with asphyxiating student and credit-card debts – largely out in the cold. Fearful of opposition or on its own impulse, Obama failed to push Congress to enact a stimulus package proportionate to the spending vacuum created by the private sector, thus ensuring the ongoing economic stagnation, though officially labeled “recovery.” Predictably, instead of lending in the face of the depressed economy, the taxpayer-rescued banks sat on their bulging cash reserves or used them to fatten their executive bonuses.
THE DEBT IS NOT A THREAT
Sudden economic contractions reduce tax revenues just when government transfer payments increase, as people claim unemployment benefits or rely on whatever remains of the social safety net to make ends meet. The result is a mounting difference between government revenues and spending: the deficit. Recurrent annual deficits lead to a higher debt as, to fund them, the government issues and sells bonds, whereby it borrows in the financial markets. As it turned out, the U.S. debt reached recently a level equal to the economy’s annual GDP, a ratio that – according to conservative pundits and economists – would scare creditors, make them dump their Treasury bonds on the markets, and charge higher interest rates. Since these bonds are promises of future dollar payments by the government, the creditors were to expect the eventual “debasement” of the dollar, higher inflation, and sharply rising interest rates. Unsurprisingly in a depressed economy, these scenarios failed to materialize. In any case, the higher debt-to-GDP ratio, a predictable byproduct of the Great Recession and subsequent depression, would have been short-lived had the government and the Fed responded adequately to the contraction.
It is essential for working people to understand that mounting deficits and, therefore, higher levels of public debt do not, in and of themselves, constitute a threat to the economy. This is not the first time in U.S. history that national debt levels reach high watermarks. Immediately after World War II, the national debt-to-GDP ratio was muc
h higher than today. Yet the economy expanded at a very rapid pace over the following decades. By the mid 1970s, the national debt had dropped to near 30 percent of GDP. Further evidence that, in themselves, high deficits and debt are not the economic curse that conservative ideologists would have us believe is that, over the last three decades, long-term Treasury yields (the effective interest rates on new federal debt) have dropped relentlessly, making it cheaper for the government to borrow.
This decline in Treasury yields suggests that, for now, global wealth perceives the U.S. as the most creditworthy borrower in the world. Ongoing developments in the rest of the world, in particular Europe’s economic disarray, worsened by extreme fiscal austerity policies, are reinforcing this perception. This means that, for the time being, “investors” in the global financial markets – the politically powerful and extremely wealthy individuals who control foreign central banks, finance ministries, international banks, and large corporations – stand ready to buy, at record high prices, all the bonds that the U.S. Treasury cares to offer.
In other words, for the time being and with no reversal in sight, the global 1 percent is willing to lend to the U.S. federal government, even (in some cases) at a loss in purchasing power, because the alternative investments are less attractive. If one can borrow $1 at a 1 percent annual interest and repay $1.01 a year from now, and if that $1 will buy more goods now than $1.01 will buy next year, it would be financially foolish not to borrow and spend the borrowed money now.
In the case of the U.S. government, that money could be spent maintaining basic public services; creating jobs for the unemployed; repairing, rebuilding, and expanding roads, railroads, bridges, communications networks, child care facilities, public schools, hospitals, parks, and other community spaces. The government can and should be helping us make our houses, transportation, and industries more energy-efficient, our urban settings more livable, our environment cleaner, and our lives healthier, longer, and more meaningful. From the perspective of the 99 percent, allowing an irrational fixation on deficits to further dilapidate the productive wealth of the nation, reduce the long-run potential of the economy and permanently lower the average standard of living of Americans, is not only reckless but outright insane.
There is no inherent reason why high levels of public debt must lead to massive joblessness and misery. The “debt crisis” has a straightforward solution (although it may not seem politically feasible at the moment): Expand the economy and tax the rich! In theory, all that is required for the “debt crisis” to disappear is for the ultimate creditors of the government, the global 1 percent, to show their civic consciousness and write off a hefty part of their public debt holdings – a small loss for them. Or, alternatively and more plausibly, we, the 99 percent, can demand that the government repudiate a good portion of the debt. There are legitimate and legal grounds for doing this. Many of those bond-holding 1 percenters are implicated in the financial misdeeds and crimes that led to the financial crash and the recession. Even a relatively small reduction, achieved by some combination of economic growth and additional taxes on the wealthy (including a reduction in military spending), would shrink the public debt to “manageable” levels.
THE “SEQUESTER” AND THE WORKERS
With this understanding, we can now return to the politics of the “sequester.” In August 2011, as the 2001 and 2003 tax cuts for the wealthy granted by George W. Bush (and extended by Barack Obama in December 2010) were to expire, Congress passed the law that set up the “fiscal cliff,” a series of “automatic” tax increases and spending cuts to go into effect in January 2013, should a bipartisan congressional super-committee fail to devise ways to halve the deficit. For this, Republicans and conservative Democrats in Congress used their power to authorize increases in the debt ceiling (the maximum level of federal debt) as a bargaining chip. In the past, Congress had raised the debt ceiling without controversy, as during the George W. Bush administration, when Congress increased the debt ceiling 19 times by a total of $4 trillion.
By the time the economy was to fall off this “fiscal cliff,” Washington agreed on another law that removed the tax-side provisions and postponed until March the implementation of the automatic spending cuts, which came to be called the “sequester.” The cuts would come from slashing “discretionary spending,” half of it military (over $40 million) and the other half domestic programs (Medicare $10 billion and other programs $30 billion), excepting Social Security and Medicaid. Pundits viewed the lifting of tax provisions as a Republican retreat in the face of popular pressure. With the 2012 re-election results backing him up, Obama appeared to be in a solid position to crush the Republican opposition, forcing them to accept additional and badly-needed spending. Clearly, the voters had rejected austerity. In light of this electoral mandate, the White House bears responsibility for its actions which have given credibility to the ludicrous notion that deficit and debt – rather than massive unemployment – are the greatest dangers to the economy.
Although often ignored by “economic experts”, the whole purpose of an economy is or should be the well-being of real people. In a true democracy, the well-being of the majority, which is to say working people, should be the supreme criterion with which to evaluate the performance of the economy and all of our legal and political institutions. By these criteria, our economy and political system have failed. But we cannot simply bemoan the dysfunction of Washington, Wall Street, and Main Street. The real reasons why deficit and debt have been turned into a major political crisis, threatening economic devastation for a majority of Americans, are socio-economic and political. Ultimately, these reasons boil down to the political fragmentation and disorganization of the 99 percent, that is, to our political weakness. We have difficulty in grasping our fundamental identity of interests which cuts across our diversity. Until we overcome our divisions, the “sequester” and all upcoming political and economic crises will be “resolved” at our expense.
Neither of the major political parties, their leaders and political organizations, will come to the rescue of working people of their own volition. This is not to justify sectarianism or deny the need to cooperate for specific goals with established organizations, including those in the Democratic Party. But it is a stern reminder that, in the last analysis, only the workers can liberate themselves. The sooner we understand this, the lower the human cost we will have to pay.
TO LEARN MORE ABOUT THE “SEQUESTER” AND ITS IMPACT:
Dylan Matthews, “The Sequester: Absolutely everything you could possibly need to know, in one FAQ,” washingtonpost.com/blogs/wonkblog/wp/2013/02/20/the-sequester-absolutely-everything-you-could-possibly-need-to-know-in-one-faq/.
Congressional Budget Office (2013), “Automatic Reductions in Government Spending – aka Sequestration,” cbo.gov/publication/43961.
TO LEARN MORE ABOUT HOW THE DEFICIT IS NOT A THREAT:
Congressional Budget Office (20013), “The Effects of Automatic Stabilizers on the Federal Budget as of 2013,” cbo.gov/sites/default/files/cbofiles/attachments/43977_AutomaticStablilizers3-2013.pdf.
Paul Krugman’s Blog “The Conscience of a Liberal,” (20
013), New York Times, “Gone Deficit Gone,” krugman.blogs.nytimes.com/2013/03/09/gone-deficit-gone/.
TO LEARN MORE ABOUT THE ECONOMIC CONDITIONS OF U.S. WORKERS:
Economic Policy Institute (2013), The State of Working America, stateofworkingamerica.org/.
TO LEARN MORE ABOUT THE MACROECONOMICS OF THE DEPRESSION:
Paul Krugman’s Blog “The Conscience of a Liberal,” New York Times, krugman.blogs.nytimes.com/
Center for Economic and Policy Research, “Economic Crisis and Recovery,” cepr.net/index.php/component/option,com_issues/Itemid,22/issue,32/lang,en/task,view_issue/
RECOVERY FOR THEM, DEPRESSION FOR US:
Blue line: Corporate Profits After Tax/Gross Domestic Product
Red line: Compensation of Employees, Received: Wage and Salary Disbursements/Gross Domestic Product
research.stlouisfed.org/fredgraph.png?g=h17
* This article was published originally on UE News, the newsletter of the United Electrical, Radio and Machine Workers of America.
** Julio Huato is an associate economics professor at St. Francis College in Brooklyn, New York, member of the steering committee of the Union for Radical Political Economics and member of the editorial board of the journal Science & Society.
UPDATE: An earlier version of this entry stated that the scheduled sequester’s cuts in military spending were “over $40 million.” It should have said over $40 billion.