THERE HAS BEEN A DEFICIT REDUCTION PLAN THAT HAS BEEN TOTALLY IGNORED BY THE MEDIA, EVEN AS COMPETING PLANS TO COUPLE DEFICIT REDUCTION WITH RAISING THE DEBT CEILING ARE DISCUSSED AT LENGTH.
As of July 30 there is no deal to raise the debt ceiling by August 2. If Congress does not act, that means no more new borrowing. The media keeps saying this would be a “default” on US debt but in fact, the government could avoid a default as it prioritizes where it will spend its reduced revenue stream. The problem arises from that reduced revenue stream. Anywhere from 55 to 60 percent of current federal spending obligations are covered by the inflow of tax revenue. Thus, failure to borrow (and the debt ceiling limits borrowing) will mean that the Federal government will have to cut its spending by close to 40 percent. Thus, the government could prioritize to make sure it pays interest on outstanding debt and principal. This would avoid defaulting on the debt.
However, cutting back current expenditures by 40% would mean that many people – perhaps federal employees, perhaps business contractors, perhaps social security recipients – will get paid much less than they are entitled to under the law – and some might get nothing.
Aside from the pain that will be felt by the specific individuals who don’t get paid, the ripple effect on the rest of the economy is guaranteed to put us right back into recession. Every contractor who doesn’t get paid will have less money to pay employees who will have less money to spend on gasoline, eating in restaurants, renting movies, clothing, trips, etc. This applies to everyone whose income falls as a result of government cutbacks.
On July 22, the New York Times ran a story describing three alternative deficit reduction plans that were being considered as possible ways to garner support in Congress for raising the debt ceiling. All three of these plans had one thing in common – they were heavy on spending cuts and two of them did not include any revenue increases.
Since early April, there has been a lot of publicity and debate about the so-called Ryan Budget that was adopted by the House of Representatives. I have commented on it as have many others. It solves the problem of long term deficits by ending Medicare and slashing spending on Medicaid, while actually cutting taxes further on high income individuals and profitable corporations. Virtually lost in the media discussions is an alternative plan known as the People’s Budget. This is a budget proposal introduced into the House of Representatives by the Progressive Caucus. It would cut 5.6 trillion from deficits over the next 10 years — $3.9 trillion of this from increased revenue. This is a real alternative to the three featured in the Times as well as to the Ryan Budget.
Interested readers can check out a detailed analysis by the Economic Policy Institute here http://www.epi.org/publications/entry/the_peoples_budget_a_technical_analysis
The actual proposal can be found on the web site of the Chair of the Progressive Caucus, Representative Raul Grijalva.
I would venture to bet that very few people even know this plan exists. In a blog posted on July 18, Economist Nancy Folbre reported that a google search of the entire archive of the New York Times turned up not one single news article that even mentioned that proposal. I extended the search by typing in The Progressive Caucus and found one reference in a blog – with no substantive discussion there either.
This omission by the Times (and by extension most of the mainstream media) helps us understand the reason why we find ourselves in our current predicament. The economy is barely growing – unemployment is outrageously high – and yet all the talk in Washington is strictly about cutting government spending. (I hate to belabor this point – but the only result of a reduction in government spending will be lower GDP growth and higher unemployment. The magical increase in confidence that some predict if government cuts its spending will not happen. When unemployment is stuck at 9% and starts to rise as government workers get laid off and when people who received money from the government find they are getting less if they are getting anything at all, total spending in the economy will fall causing more unemployment.)
The budget proposed by the Progressive Caucus would increase government spending on education and infrastructure and cut spending for wars and high priced prescription drugs. Revenue increases would come from a restructuring of the tax code so that millionaires and profitable businesses pay their fair share. Right wing bloggers who had deigned to even mention this proposal attack it as old fashioned tax and spend liberalism – ignoring the fact that it cuts the long term national debt significantly. However, there is a germ of truth in their attack. The Progressive Caucus’ budget will raise spending significantly and raise revenue as well. So-called “tax and spend” liberalism actually works (the 1960s showed rising government spending and rising tax revenues as a percentage of GDP and rapid economic growth, very low unemployment and rapid productivity growth as well). Economists call this the principle of the balanced budget multiplier. Every tax dollar received from high income people and spent on things like infrastructure will raise GDP and raise employment. (Rich people are already spending as much as they wish to spend – the rise in taxes will come from their massive savings. If the government spends it usefully – on infrastructure or education for example – that will raise total spending and total employment as well.)
If the People’s Budget plan were part of the discussion, it might be possible to focus the public’s attention on unemployment and how to cure it. Instead of insisting that we cannot afford things we want (like modern infrastructure), we could be debating truly positive deficit reduction plans.
But I want to close by returning to the threat to the economy posed by a disruption of government expenditure should Congress fail to raise the debt ceiling. I happen to have been among those people who believed President Obama should invoke section 4 of the 14th Amendment and just borrow money to meet our government’s obligations despite Congress’ failure to raise the debt ceiling.
(Here is the actual language of the 14th Amendment’s relevant section: “The validity of the public debt of the United States, authorized by law, including debts incurred for payment of pensions and bounties for services in suppressing insurrection or rebellion, shall not be questioned. But neither the United States nor any State shall assume or pay any debt or obligation incurred in aid of insurrection or rebellion against the United States, or any claim for the loss or emancipation of any slave; but all such debts, obligations and claims shall be held illegal and void.” I take this to mean that borrowing to pay interest and principal on a debt already incurred is Constitutionally protected – that debt ceiling legislation by Congress is, in fact, unconstitutional if it forces the government to not meet its debt obligations.)
But there’s an alternative way to the same result. President Obama should just invoke his inherent emergency powers to see “that the laws are faithfully executed.”
The same day that the New York Times published the comparison of the three plans mentioned above, two law professors wrote an OP ED in which they argued that President Obama should just raise the debt ceiling on his own. Here is a link to their article: http://www.nytimes.com/2011/07/22/opinion/22posner.html
“When Abraham Lincoln suspended habeas corpus during the Civil War, he said that it was necessary to violate one law, lest all the laws but one fall into ruin. So too here: the president may need to violate the debt ceiling to prevent a catastrophe — whether a default on the debt or an enormous reduction in federal spending, which would throw the country back into recession.”
I happen to think this is a great idea. The true disaster is not a ballooning federal debt but the persistence of high unemployment. Uncertainty over the debt ceiling increase is contributing to the sluggishness of the economy. I urge everyone reading to this to write the President urging him to raise the debt ceiling on his own. Let the Republicans sue him or try to impeach him. At least we won’t be sending the economy off the cliff.
with David Guistina
with Joe Donahue
with Brian Sheilds
with Alan and Ray
with Alan Chartock
with Susan Barnett