4 Ways the Sequester Worsens the Inequality that Is Killing the Economy
Someone asked the Master about the principles of … traveling into the vast inane.
– From the Bao Pu Zi, AD 320,
Joseph Needham, Science and Civilization in China
Welcome to the vast inane. Today the “sequester” -- mindless, across-the-board cuts of military and domestic spending designed to be abhorrent -- will go into effect. Republicans claimed a “big victory” as House Speaker John Boehner shut down any negotiations and sent the House home. The cuts will cost jobs and add to the headwinds facing the economy. The sequester will be followed by operatic melodrama over keeping the government open after the end of March and keeping the government from defaulting on its debt beginning in the middle of May.
The deficit is falling faster than any time since the demobilization after World War II, Americans are afflicted with mass unemployment and falling wages, but Washington will be traveling into the vast inane for the foreseeable future.
The media is focused on the possible effects of the cuts. But what is actually being sequestered is any sensible debate about the fundamental changes needed to revive the middle class and make this economy work for working families once more. The old economy -- and the failed economic ideas that drove it – benefited the few, while undermining the broad middle class, even before the collapse.
Sadly, that old economy is back. Consider the unsustainable imbalances that contributed directly to the Great Recession:
1. Global Trade Imbalances. The U.S. trade deficit is still over $1 billion a day. The trade deficits with China remain the largest bilateral imbalances in history. This costs the U.S. good jobs and undermines wage growth. The Chinese suppress consumption in their own country to sustain their export-led growth. This imbalance is destabilizing and unsustainable, but is not up for discussion. Instead, the administration and the Republican leadership push traditional corporate trade accords that will only add to the problem.
2. Gilded-Age Inequality. In the two years coming out of the Great Recession, the top 1 percent captured an obscene 121 percent of the income growth, while the remaining 99 percent lost ground. The rich pocketed all the new income growth and then some. Corporate profits are setting new records as a percentage of the economy; wages are setting new lows. As Nobel Prize-winning economist Joseph Stiglitz has argued, extreme inequality not only crushes the middle class, it saps the demand needed for a prosperous economy.
It also corrodes our democracy and corrupts our politics. In his State of the Union address, President Obama called for raising the minimum wage, but deficit jockeying is consuming the limited congressional calendar, curtailing any discussion of even this modest reform. Also needed are measures to empower workers to organize and bargain collectively for a fair share of the profits and productivity they help to produce. Corporate tax reform should offer lower rates to those companies that create jobs at home rather than abroad and that limit the divergence between the median wages of workers and the compensation of the top executives. Instead, Republicans are waging war against unions and basic worker rights, and CEOs continue to receive million-dollar short-term incentives to plunder their own companies.
3. Starved Public Investment. All the posturing about cutting government -- with the president bragging about bringing discretionary spending down to levels of the economy not seen since Eisenhower and Republicans vowing to cut it to pre-industrial levels -- ignores the painful reality that America is starving public investments vital to its future.
Our dangerous and decrepit infrastructure costs lives while making our economy far less competitive. If we are to be a high-wage country, we need to rebuild, modernizing and hardening our infrastructure to better withstand the extreme weather that is surely our fate.
We aren’t even doing the basics in education -- from universal preschool to affordable college and advanced training. Instead we’ve decided to use testing and piecemeal privatization to substitute for investment. It hasn’t and won’t work.
We should be doing more, not less, public investment in research and development, particularly in clean energy and the green industrial revolution that is already sweeping the world. Some of this could be achieved from changing priorities -- ending obscene subsidies to Big Oil and Big Pharma, reducing our bloated Pentagon budgets -- but any progress gets sabotaged by the fixation on cutting, not investing wisely.
4. Bloated Finance. Wall Street’s financial wilding inflated the housing bubble and then blew up the economy, doubling our national debt in the process. Deemed too big to fail, the big banks were bailed out at the cost of trillions. Financial reform tried to strengthen accountability, but the big banks have emerged from the crisis bigger and more concentrated than ever. The financial subsidy they pocket from the reality that they won’t be allowed to fail makes it difficult for small banks to compete. The guarantee also encourages gambling with other people’s money, for they pocket the winnings confident that we will cover their losses. Progressive Democrats in the Senate -- Sherrod Brown, Jeff Merkley, Bernie Sanders and others -- as well as conservative Republican bankers and pundits have called for breaking up the big banks. But this barely registers in the public debate.
President Obama had it right when he said in his State of the Union address: “We just can’t cut our way to prosperity.” We need to move beyond the “vast inane” in Washington if we are to begin even to consider what must be done to revive the American middle class.
Two years ago, Occupy Wall Street showed what it took to “change the conversation,” as the pundits described it. It will take a much more powerful and disruptive movement to actually begin to drive the reforms we need.