By Dean Baker
Truthout, August 9, 2011
Standard & Poor’s (S&P) downgrade of US debt should be seen as the joke it is. The rating agency, which gave investment grade ratings to hundreds of billions of dollars of subprime mortgage-backed securities, made an accounting error of $2 trillion in doing its assessment of the US financial situation.
However, when this error was called to S&P’s attention, it still went ahead with the downgrade. Just like the war in Iraq, the policy was decided in advance of the evidence.
The nonsense with the S&P downgrade is yet another distraction – after four months of haggling over the debt ceiling idiocy – from the real problem facing the country: a downturn that has left 25 million people unemployed, underemployed or out of the labor force altogether. Tens of millions of people are seeing their career hopes and family lives wrecked by the prospect of long-term unemployment.
The incredible part of this story is that the people who are responsible are all doing just fine, and most of them are still making policy. Furthermore, they are using their own incompetence as a weapon to argue that we have to take even more money from the poor and middle class, this time in the form of Social Security, Medicare and Medicaid benefits.
The basic story is that the economy needs demand. The housing bubble generated more than $1.4 trillion in annual demand through the construction and consumption that it spurred. Now that this demand is gone, there is nothing to replace it. President Obama’s stimulus was replaced by some of the lost demand, but it was nowhere near large enough. We tried to fill a $1.4 trillion hole in annual demand with around $300 billion in annual stimulus in 2009 and 2010. In 2011, most of this boost has been exhausted and the economy is coming to a near standstill.
If we had serious people in Washington, they would be talking about jobs programs, about rebuilding the infrastructure, about work sharing, and any other measure that could get people back to work quickly. However, instead of talking about ways to re-employ people, the fixation in Washington is reducing the deficit.
This concern with the deficit is absurd on its face (if the markets were panicked about the deficit, the US government would not be able to issue long-term debt at less than 3.0 percent interest), but it has the backing of powerful forces. Wall Street investment banker Peter Peterson is doing a full-court press, paying any budget analyst he can find to say how terrible the deficit problem is. The Washington Post and National Public Radio are also doing the full court press, abandoning any pretext of objectivity as they highlight all the deficit news all the time – using a healthy dose of Peterson funded experts to make the case.
The real goal of this hysteria is the dismantling, or at least scaling back, of the core social programs that working people depend upon: Social Security, Medicare and Medicaid. It is important to realize that this is not a traditional left-right battle. Polls consistently show that people across the political spectrum overwhelmingly support these programs and do not want to see them cut. Even the vast majority of Tea Party Republicans support these programs.
Rather than being a left-right split, this is a top-bottom split. There is a bipartisan consensus among the elites that these programs should be cut. The guiding philosophy of this drive is that public money that goes to programs for middle income and poor people is money that could be in the pockets of the wealthy. For this reason, Social Security, Medicare and Medicaid are an offense to their sensibilities. They are programs that help ordinary working people, not the rich, therefore these programs conflict directly with their philosophy of government.
The remarkable part of this story is that elites are effectively using their incompetence in managing the economy as the core of their argument for cutting these social programs. After all, no one was talking about cutting these programs until the deficit exploded, and the reason the deficit exploded was that the collapse of the housing bubble wrecked the economy.
If these elites had a clue about the economy, they never would have allowed the bubble to grow to such dangerous levels. The economy would not have collapsed, the deficit would be manageable and no one would be discussing cuts to Social Security and the other programs.
In other lines of work, incompetence on the job gets you fired. In policymaking in Washington, incompetence means more responsibility and power.
Dean Baker is a macroeconomist and co-director of the Center for Economic and Policy Research in Washington, DC. He previously worked as a senior economist at the Economic Policy Institute and an assistant professor at Bucknell University. He is a regular Truthout columnist and a member of Truthout’s Board of Advisers.