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Home Publications Blogs Beat the Press More Scare Stories on the Deficit to Get Folks to Give Up Their Social Security and Medicare

More Scare Stories on the Deficit to Get Folks to Give Up Their Social Security and Medicare

Sunday, 24 April 2011 11:28

Steven Pearlstein did his part for the Wall Street crusade to get people to surrender their Social Security and Medicare. He warned readers that if we don't follow the Wall Street deficit reduction agenda, the dollar could enter a free fall. I would say that this is one of the silliest things the paper has ever published, but this is the Washington Post that we are talking about.

Anyhow, let's put on our thinking caps and try to envision what Pearlstein's scare story would look like. Currently, the euro is equal to around 1.45 dollars, there are approximately 6.5 yuan to a dollar and around 80 yen. Suppose we don't follow the Wall Streeters' wishes. Will the dollar fall to 3 to a euro, will it only be worth 3.5 yuan and 40 yen?

Does anyone think this story is plausible? We supposedly have been begging China to raise the value of its currency by 20 percent. Is China's leadership suddenly going to sit back and let the yuan rise by 100 percent? What happens to China's export market in this story? The same is the case for our other trading partners. Europe will lose its export market in the U.S. and suddenly U.S. made goods would be hyper-competitive in Europe's domestic market. Japan, Canada and everyone else would face the same situation.

These countries will not allow their economies to be destroyed by the loss of the U.S. export market and a surge of imports from the United States. They will undoubtedly take steps to stop and reverse any free fall of the dollar, if we did begin to see one.

In other words Pearlstein and the others are peddling total nonsense when they try to push this scare story. The bottom line is that they want to cut benefits to the middle class. They don't have a good story to sell a policy that will be harmful to large segments of the population, especially when the Peter Petersons of the world are making out like bandits. So they make stuff up.

As every economist knows the story of our deficit in the short-term is the downturn created by the collapse of the housing bubble. The deficit is propping up the economy following the loss of $1.2 trillion in annual demand from private sector.

The deficit story in the long-term is health care. Our health care system is out of control. Fixing health care would end the deficit problem, but this would reduce the income of the insurance industry, the pharmaceutical industry and other powerful interest groups. So, the Washington Post would rather just see people go with out health care. Hey, someone's got to pay.

Comments (7)Add Comment
written by RC Jennings, April 24, 2011 2:49
Just wanted to say say thanks for your continual (and continuous) reporting and your efforts to get a few newspapers to actually use those things called facts

keep it up
Drug Dealers Never Let Rising Prices Steal Their Victims
written by izzatzo, April 24, 2011 3:03
The same is case for our other trading partners. Europe will lose its export market in the U.S. and suddenly U.S. made goods would be hyper-competitive in Europe's domestic market. Japan, Canada and everyone else would face the same situation.

Exactly. The hell with relative productivity values determining comparative advantage reflected in floating transparent exchange rates.

Reverse engineer it and require the USA as Global Consumption Junkie to consume everyone else's output at the desired manufactured exchange rate.

It's like a bunch of drug dealers with one large customer. No one is going to break rank and allow rising relative prices via exchange rates to force their only customer to go cold turkey, who then turns on them and starts competing for new customers as a drug dealer itself.

Stay the hell off my corner Uncle Sammy. I'm the pimp and you're the john, not the other way around.
Strong dollars and cheap sweatshops.
written by FGS, April 24, 2011 4:02
If the dollar falls too far, the greatest return to capital might just move back to the United States. But Wall Street likes its Chinese sweatshops just fine; the government can be bought and the workers don't have to be. Expensive dollars are the key to both.
Are you sure you linked to the right article?
written by AndrewDover, April 24, 2011 4:05
Steve Pearlstein wrote:

"my guess is that they would acknowledge that the dollar is in long-term decline that is inevitable and economically desirable."

Sounds to me like that article is arguing for a dollar decline, not warning against one.

Dollar's decline
written by kaj, April 24, 2011 8:15
It is unbelievable; the Euro is up and the Dollar is down, with all the problems of Euro-Med! I was in Sicily and Italy in 2002, when the Euro was .87 cents to the Dollar and the prices of basic, non-organic produce in Euro/Dollar parity (1 Euro : 1 Dollar exchange rate) were higher than in Dollar terms! This was Sicily, one of the poorest regions in Italy! Up North, hotels were very expensive. Same in France and Germany in 2006. Recently, of course, there is no point in talking.

So, what determines the value of the Dollar vs. the Euro? Balance of current accounts deficit? The U.S. deficit vs. the Euroland deficit is not bad at all. Purchasing price parity? It is the obverse. Interest rate differentials and future interest rate increases by ECB. That is a joke. So, what is it?

It is the same mobsters, the too-big-to-fail banks whom Bernanke has let loose, trading trillion of dollars a day in empty commodity futures with a cheap Fed-funds rate.

The tide will turn one day and I will go back to Europe more regularly.

written by skeptonomist, April 25, 2011 8:46
Debt/GDP was increasing during the Bush administration despite the housing bubble, and in a way the collapse of the bubble was a catch-up on unsustainable tax policies during that time. The deficit problem since 1981 has been the insufficiency of taxes and this will continue to be a problem in the future; the effect of health-care cost increases is on top of that. Total national income and thus government revenue would probably be increased if wealth and income were more equitably distributed - since 1947, debt/GDP has decreased in times when tax structure was more progressive, and increased during administrations which made it less progressive.

Of course health-care reform would be a major boon to everyone except those currently profiting excessively from the system (although they are a sizable and rich part of the economy), but it is not by any means the full story of deficits.
Are you sure the world will prop up the dollar?
written by Dave Kane, April 26, 2011 5:08
Love your stuff Dean. Keep it up! You are one of the very few who provide some sanity and reason in the current surreal world of public policy debate where logic has absolutely no place.

I worry about your assumption that the world will prop up the dollar in order to keep their big customer. The U.S. is slowly becoming a smaller part of the global economy as middle classes surge around the world, especially in countries with larger populations/markets. It is only a matter of time before the others will decide to move away from the dollar to a true international currency based on a basket of global currencies or some other option.

Once that happens (and it seems to be rapidly approaching), if the U.S. still has anything like the current (or projected) budget or trade deficits, it seems like it will face some pretty severe consequences.

Am I wrong?

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About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.