Will Right-Wingers Stand in the Way of the Bailout "Main Street" Desperately Needs?
There's a fight brewing between the conservative movement's bitter dead-enders -- ideologues clinging desperately to their discredited rhetoric about "limited government" -- and progressives, joined by most economic experts from across the political spectrum.
At issue is whether or not to spend as much as one-tenth of the projected costs of the Iraq and Afghanistan wars to help rescue the real "nuts and bolts" economy in which most Americans work and live.
Washington lawmakers were able to find more than $700 billion -- in addition to the $900 billion they had already spent this year -- to bail out the ailing financial sector. But that cash won't do anything to stave off the intense economic pain that ordinary Americans are already feeling and which most experts agree is likely to get much worse in the coming months and years.
For that, we need a bailout for the rest of us: a major spending program on public infrastructure that will put the unemployed to work; desperately needed funds for a tattered social safety net that will be sorely tested as we work our way through the economic crisis; aid to states and municipalities that are seeing their revenues crash and new protections for those who had built a nest-egg for retirement only to see a good chunk of it vanish in a poof of smoke.
It's not just an economic necessity but a moral imperative. We're experiencing a profoundly injurious economic meltdown that was created by the excesses of the wealthy but will be felt hardest by everyone else. According to Kiplinger Forecasts, "economic pain will be spread unevenly" over the next couple of years, with defense contractors, health care providers and "data providers, accountants and lawyers hired to man the massive federal rescue plan" doing just fine. Everyone else? Well, the news is bleak.
Industrial production has dropped in seven of the last eight months; the economy shed 159,000 jobs last month -- the highest number in five years -- and when you include people who are "involuntarily" working part-time because there are no full-time gigs available, and those who have been unable to find a job for an extended period, more than 1 in 10 Americans are struggling to find the work they need to stay afloat. One in six American homes are now "underwater" -- with more debt attached to them than they're worth on the market -- and the Congressional Budget Office estimates that $2 trillion in retirement savings has evaporated in the past year and a half. That estimate was made when the Dow Jones Industrial Average was around 11,000; it was under 8,500 as of the time of this writing.
When George W. Bush and his Treasury secretary, former Goldman Sachs CEO Hank Paulson, were pushing Congress to pass their plan -- 200 economists thought precipitously -- they used the Iraq War strategy, arguing that inaction posed an imminent threat to the security of the United States. They said that while a ton of new deficit spending was a tough pill for the taxpayers to swallow, not pulling the trigger would lead the crisis, using the clichÃƒÂ©s of the day, to spread quickly from "Wall Street" to "Main Street."
They were half right; "Main Street" had already been in crisis, and the financial sector's crack-up has made matters worse. Now we face the prospect of a vicious cycle in the "real" economy, with firms that are unable to secure the credit they need to function and grow laying off workers, which will create a climate in which people spend less, which will cause a drop in demand for everything a capitalist system produces, which will cause further economic contraction. Meanwhile, homes are being lost, and state and local budget revenues are plunging, which will lead to more layoffs of public employees, more lost homes, less tax revenues for local governments, etc. That will mean cuts for vital social programs at the exact time when people need them most. It's not a hypothetical scenario -- it's already happening across the United States.
That's why a bailout of the rest of the economy is not just an ideological matter -- "spreading the wealth" -- but an economic imperative: We've got to prop up people as well as institutions in this dark period in order to maintain demand for the goods and services the economy produces. The Bush administration's massive cash infusion into the banks, combined with other actions by the Fed and by foreign governments, might just help unfreeze jammed credit markets, but the private sector is grinding to a halt nonetheless, and that means the public sector is one of very few potential buyers out there these days, and the only one with any credit left to tap.
This is classic economic theory and shouldn't be controversial. But a proposal by Congressional Democrats for a relatively modest plan to fix long-neglected roads and other public infrastructure, extend unemployment benefits and eligibility for food stamps and help out cash-strapped local governments is facing stiff resistance from many conservatives in Washington.
Bush, who had promised to veto a second stimulus package (but may now be softening to the idea), told reporters this week that Americans' economic anxiety had begun to subside. "I have heard that people's attitudes are beginning to change from a period of, you know, intense concerns and, I would call it, near panic to being more relaxed," Bush said. He added that Americans are "beginning to see the effects of changes" in the financial markets and "the attitude here is a little different than it might have been a week ago."
Jarringly out of touch? You bet, but he's not alone. House Minority Leader John Boehner, R-Ohio, described the Democratic proposal as a "big government boondoggle." And John McCain has been out on the stump promising to heal the nation's wounded economy through a freeze on spending.
The reality is that the Democrats' proposal -- about equal to the cost of 12 of the 66 months (and counting) that we've occupied Iraq -- isn't nearly big enough. America needs to rally around the idea of a "green recovery" -- investing in new energy sources -- and do more to keep homeowners in their houses. And we need to take care of the elderly, many of whom have seen their retirement accounts decimated in the meltdown. We should be investing in education and health care -- in our "human capital" -- and those investments should be on par with what Congress has been all too willing to lavish on the banking industry.
Conservatives -- many of whom are thrilled with "welfare queens" of the corporate variety -- are whining about how this kind of stimulus amounts to "socialism." It's their latest act of rhetorical desperation.
So, instead of throwing a life preserver to a middle class that has suffered a long economic assault, House Republicans, along with their party's nominee, favor slashing corporate taxes, cutting capital gains taxes and then maybe sending a modest stimulus check to American taxpayers so they can buy some crap at Wal-Mart.
There are two problems with that approach. The first is that a check for a few hundred dollars gets used up quickly and then is gone, whereas investing in infrastructure, including new energy infrastructure, creates new jobs. As economist Jared Bernstein, who is consulting with House Democrats, put it: "People need jobs more than they need checks."
The second is that the conservatives' "stimulus" is based on ideology rather than on what gives the economy the biggest bang for the buck. This graphic from the Economic Policy Institute, a nonpartisan think tank, illustrates just how wrong the Right's approach really is:
(click for larger version)
For each dollar you spend on tax cuts for Big Business, you get 30 cents worth of stimulus; a dollar cutting capital gains boosts the economy by less than 40 cents, but putting a dollar into the pockets of people at the lower end of the economic ladder gets you more than a buck worth of economic activity in return.
Ultimately, this debate represents a "teachable moment" -- an opportunity to argue, forcefully, that deficit spending is neither inherently good nor bad; it depends on what it's for. When Bush was pushing for tax cuts for the wealthiest and calling it a "stimulus package" -- despite the fact that Nobel Prize-winning economists were saying it would have no beneficial effect on the larger economy -- that was deficit spending that hurt America. Pumping money into the brick-and-mortar economy to keep it afloat, repairing our creaky national infrastructure, investing in cleaner energy and keeping people from going hungry are exactly the kind of things that we should do, deficit or not.
Unfortunately, the idea that the financial meltdown is going to force spending cuts, regardless of who wins the November elections -- the opposite of what the doctor should be ordering as the economy slips deeper into recession -- has seeped into our discourse. Recall the debate between McCain and Barack Obama in which moderator Jim Lehrer insisted that the candidates explain what proposals they'd give up because of budget constraints. Economist John Irons calls it a "false fiscal dilemma," explaining that "not only are (dire) assessments of next year's deficit intentionally and wildly overstated, but the actual deficit being considered is actually appropriate and necessary given our current circumstances. In fact, the levels of national debt that would result from an economic stimulus (of even a substantial size) are clearly manageable and consistent with a growing economy." (Also see former Labor Secretary Robert Reich's "Deficit Shackles: Will January 2009 Repeat January 1993?")
The coming weeks and months will determine whether we make the moves necessary to stave off a financial crash of 1932 proportions, or indulge in what columnist Matthew Yglesias dubbed "neo-Hooverism."
According to the Washington Post, "Unless the White House agrees to negotiations to assemble a package that could win GOP votes and the president's signature, (Speaker Nancy) Pelosi is unlikely to move forward until the next administration takes office." That means that after rushing as much as a $1 trillion to bail out the financial sector, the rescue we need for our real economy is on hold until the bitter dead-enders of the "Reagan Revolution" are swept from power.