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Home Publications Blogs Beat the Press The Deficit Problem Is Not “We, the People,” It is “You, the Incompetent Elite”

The Deficit Problem Is Not “We, the People,” It is “You, the Incompetent Elite”

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Wednesday, 12 May 2010 04:29
New York Times columnist David Leonhardt told readers today that the problem of the debt is “we, the people.” Is that so?

Was it we the people who were too dumb to see an $8 trillion housing bubble and recognize that its collapse would wreck the economy? No, that was the job of the great Maestro Alan Greenspan and his sidekick Ben Bernanke, the brilliant scholar of the Great Depression. It was also the job of all the economists who do research and opine to the public on the macroeconomy. Virtually all of these highly educated highly intelligent economists either did not see the bubble or insisted it was not worth their time.

Our deficit today is due to the collapse of this bubble. There is no dispute about this. If there had been no bubble and the economy was still chugging along with 4.5 percent unemployment, the budget would either be balanced or close enough that no serious person would be expressing alarm (check out the pre-crisis CBO projections).

Is our huge deficit a problem today? Not if you think people should have jobs. Private sector demand has plunged because of the collapse of the bubble. If the public sector does not fill the demand gap with deficit spending, then we have less demand and fewer jobs. That’s worth saying a few hundred thousand times since the deficit hawks have filled the airwaves and cyberspace with so much nonsense.

People who want smaller deficits want fewer jobs – that is the way the economy works right now. There is no plausible story through which cutting demand from the public sector will generate more jobs in the private sector.

How about those scary long-term deficit stories? It’s all health care; it’s all health care. Those who know arithmetic know this.

The deficit hawks tell us we can’t fix our health care system. What they actually mean is that they don’t want to confront the powerful interest groups that cause the United States to pay two or three times as much per person – with no obvious benefit – as people in other wealthy countries. It is easy to devise mechanisms that will get our costs more in line with other countries (e.g. this or this).

Because such measures threaten the incomes of powerful interest groups the politicians won’t push them. And, because they have not been endorsed by enough elite economists (you know, the folks that couldn’t $8 trillion housing bubble) elite journalists will not talk about them either. Instead, they will blame ordinary workers for thinking that they should be able to get a decent retirement and have the same sort of health care coverage as people in every other wealthy country.
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Dean Baker Takes on the Bean Counters
written by izzatzo, May 12, 2010 6:32
Bean counters used to be the scourge of economists, for making the grave error of casting economic issues as zero sum games among winners and losers, drawing from a fixed pie of goods and services. Bean counters were constantly lectured for ignoring determinants of growth under capitalism, particularly from the perspective that tampering with the goose that lays the golden eggs with taxes or regulation would make the pie of available goods and services smaller for everyone. It's either trickle down or no trickle at all.

Today bean counters have returned in force as the go-to redistribution alarmists of pop tart economists, including many of the same economists who once despised bean counting, appealing to a lowest common denominator teabagger mindset of bean counting with fearmongered trade-offs. The economics of take and give is clear even to the youngest child and teabagger bean counters, emerging from a stupor of ignorance from decades of free riding and non-participation in politics and economics, have suddenly decided to jump in and draw boundary lines on what belongs to them versus everyone else.

For them, bubbles, deep recessions, foreign exchange rates and Keynesian economics is a strain on the attention span, too many balls in the air to perceive at one time. On the upside, especially during the "Great Moderation" that freed the US from severe business cycles forever, they were lulled them into a stupor of economic ignorance. Free markets in their magic of Hayekian infinite detailed individual decisions governed and nurtured the forces of growth.

Then came the Deep Recession and the return of the Bean Counters, wagging the debt and deficit finger at the immoral welfare sluts for daring to challenge the Golden Geese of Financial Capitalists. Dean Baker is especially a problem to the New Age Bean Counters, because he keeps returning to the basics of non-zero sum full employment productivity and economic welfare as the appropriate baseline of all other policies, the same baseline followed by the Bean Counters themselves during the upside, especially during the housing bubble.

Dean Baker, the commie socialist. He used to be one of us, now he's one of them.
Enjoying the typical good points that remain unrefuted
written by Xelcho, May 12, 2010 8:58
Dean,

Could not agree more with your analysis. It would be nice to get this message out to more ears/eyes. What is the name of a government system that socializes business risk and privatizes the rewards?

Izzatzo,

I hope you are gaining some form of financial reward for your hard and consistent work here. I have found your comments soothing and supportive of Mr. Baker's points. While others may be mad and disrespectful of your comments I enjoy them as they add humor and underscore the how conjecture has supplanted empirical data and simple logic.
Better context provided than usual.
written by Aditya Savara, May 12, 2010 9:04
I liked this post because you put in better context than usual.

1) "all of these highly educated highly intelligent economists either did not see the bubble or insisted it was not worth their time"

This is an important distinction in my view. Because it could be argued: who are they to say there is a bubble? What if the speculators were actually correct? So I think that this issue -- of what the feds should do during perceived bubbles -- needs to be discussed more by society (as you have been doing). Whether people agree with your solutions or not, it's important that you're raising this issue repeatedly, that the Fed should not ignore bubbles. Maybe they should, maybe not -- but the question should definitely be discussed.

2) "Is our huge deficit a problem today? Not if you think people should have jobs."

Again an important point. For two reasons: A) if there are unemployed people, they are more likely to work for minimum wage and I believe that the market will create more minimum wage jobs (assuming there is enough money in the rich people's coffers, which I think there is). I have no problem with lawyers and doctors and engineers accepting minimum wage. In your proposal (as it is at least) government spending will artificially prop up wages. B) Even if we accept that the government should make sure everyone has jobs -- which I am fine with -- then I still demand that it create minimum wage jobs, or at least lower pay jobs. I do not want my tax money paying some engineer 80 K per year UNLESS it was a job that needed to be done anyway in the longterm, like fixing a bridge. And I think we both agree you are not only talking about earlier spending, but also additional spending. And that additional spending should be confined to minimum wage or at the VERY least, severely reduced wages from the average market value -- since no matter what value it is, it will raise costs for private companies to employ people in the field compared to if there was no intervention. And again, I think it is completely unfair to take the cashier's tax money to employ an Engineer at a normal Engineering wage just so the Engineer "has a job" still. If they just want to "have a job" they can take the reduced wage offer. Otherwise they can be jobless - fine by me, if the market has no use for them.
Taxes, taxes, taxes
written by skeptonomist, May 12, 2010 9:16
The size of the deficit at this particular time can be attributed to the elite who encouraged the housing bubble and abetted the financial foolishness. But we have been running deficits for many years (the supluses during two years of the Clinton administration were small if the obligations to SS recipients are honored, and were mainly due to the stock market bubble anyway) and the cause of this is simple - tax rates have been cut too much. Health care does not account for the growth of the national debt as a fraction of GDP over the last 30 years. This is simple arithmetic, as Dean likes to say. The American people bear some responsibility for this as they will not elect politicians who admit that they will raise taxes, but economists have certainly not been helping.

Do economists have problems with simple arithmetic? If not, why are they not getting the message across that taxes must be raised? Is it because they buy into the absurd claim that income tax rates over 35% would be harmful to the economy? If so, they have must have essentially zero knowledge of economic history (actually quite a plausible hypothesis on other grounds).
...
written by Eric, May 12, 2010 9:26
Well, yes, I guess that it was a whole lot of the people that were too dumb to see the $8T housing bubble. Alan Greenspan and Ben Bernanke didn't have anything to do with my wife's cousin and husband decision that they could afford a $335,000 mortgage on $50,000 of income. Now I am pretty positive that a bunch of venal chuckle-heads were involved in approving the loan, but they were under no illusions that they could afford the loan as they agreed to it. They wanted simply to hang on through the teaser, take the appreciation, square up the pre-payment penalties and move to a cheaper location (to SC from FL) with a nice DP ready to go on their next home. If they had followed this plan even 12 months early it might well have worked, but as adults I don't think they can point their fingers at anyone but themselves (and in fact, they have not). At closing - at least in Ohio - two things are made crystal clear to the borrower: one is the terms of repayment of the loan and another is that there is no promise whatsoever of any refinance of the loan and I believe closings in other states have these features. But somehow the two most common complaints I hear are that people did not understand what they needed to pay or that they were promised a more affordable refi. Now I don't think anyone should be burned at the stake for this kind of mistake, but blaming Alan and Ben for this is too much. Those gentlemen have enough bad decisions of their own without saddling them with other folks bad decisions.
...
written by Nick B from DC, May 12, 2010 11:28
I like the fire in todays article! You must be getting sick of correcting the same mistakes the press makes. Again, always appreciated.

Question to a commenter regarding bubbles. Really, they might not exist? Don't tell me this is based on your idea that everyone is a rational homo economicus based on incorrect assumptions on rationality and that markets are always right. Go watch that recent PBS special or read up on the work by behavorial economists, economic sociologists, etc.

Also, how would you explain that dutch tulip craze cited as the "first bubble"?

Also, the people who are being hit hardest by the recession probably isn't doctors, lawyers and engineers, but those in the lower or middle class. While paying them a minimum wage is better than nothing, why not pay them a living wage appropriate to what they would make? Remember, the idea of government stimulus is a lack of private demand, not that we don't have work that needs to be done, but that the private sector isn't willing to do the hiring. Also, if you pay people more money, they will also spend money, thus stimulating the economy. Good luck telling MD's, JD's, and engineers to work minimum wage or nothing. Sounds slightly Hooverish to me..

...
written by diesel, May 12, 2010 11:38
What kind of dystopia will the United States be in 20 or 50 years if the "government is the problem" gang, who think that taxation is confiscation, succeed? We are already a hybrid cross between a first-world manufacturing giant and a third world agricultural-exporting military dictatorship. What is their long range vision for America? Do they really believe that gross inequality fosters efficiency in overall outcomes? Outcomes that factor in all social and environmental costs and not just "the bottom line" for this or that enterprise or privileged group? As long as America had a bunch of "free" natural resources to sieze and privatize, their intellectual business model was appropriate (nevermind the moral aspect). But it is not applicable in a more hedged-in settled world. Unless of course you decide to sieze your neighbor's stuff. Envisioning our future as created by this crew brings to mind one of those terrifying murderous clowns sadistically tormenting his victims interleaved with the folksy vision of our benevolent leader, Reagan, reassuring the fearful child-population with bedtime stories and fairy tales of an America that isn't, never was, and shall never be.
...
written by Old Mole, May 12, 2010 12:26
Also, the numbers in Leonhardt are dubious. See Krugman's blog today.
True, but...
written by MattJ, May 12, 2010 12:50
If there had been no bubble, then tax revenues throughout the 2000's would have been much lower; therefore, federal spending would have to have been lower to maintain the relatively low deficit you seem comfortable with. Now that the bubble has popped, we will need to reduce spending to match the real federal income. Your counter-factual seems to be based on the bubble continuing, not on it never having happened.
...
written by izzatzo, May 12, 2010 1:02
Funny how that works. When a private equity firm raids a company and sucks the life out of it with highly leveraged debt borrowed on expected future revenue and profit, eventually leaving it and its employees crippled and worthless after enriching the parasitic investors, it's Ra Ra Ra Free Markets all the way to the bank and may the most efficient players win.

But when a homebuyer with $50k income leverages it to take out a $335k mortgage on the same forecasting criteria and the deal goes belly up after enriching the same group of parasites, suddenly it's all about personal responsibility and the moral hazard of excess credit driven by an asset bubble that everyone was supposed to see, despite everyone in sight up and down the financial food chain cheerleading it all the way.

Those fishermen in Louisiana are really stupid and irresponsible aren't they? They should have seen the spill coming using their own fishfinding gear from the boats. What blithering idiots, to go and invest in a livelihood like that after depending on the Dept of the Interior for risk evaluation of oil spills.

It's almost as stupid as paying for private health insurance and actually expecting catastrophic events to be covered, or buying a house and expecting to be employed and make the payments.

Stupid liberals.
Confonting interest groups...
written by scathew, May 12, 2010 1:50
I think it's well said and I agree with most however:

they don’t want to confront the powerful interest groups


I don't think captures the entire spectrum of views. Many here are ideologically against any sort of government intervention whatsoever. They have decided, whether out of sincerity or convenience, the only "good government" is "no government".

Now some of these people are this way because they're greedy and some because they've been convinced (brainwashed?) on an ideological level that government can do no good. In the end it doesn't matter - you have a large block of people, who won't listen to reason or logic and follow a religion of Ayn Rand.

So in that sense, it isn't just the spineless who are gumming this up, but also people who have a radical viewpoint (radical, except there are a ton of people who believe it these days, so is that radical anymore?).
@diesel
written by scathew, May 12, 2010 1:58
What is their long range vision for America?


That's a question I've been wondering for a long time, though it's just as true of liberals.

What is our vision of the future? I mean, we used to talk about "the end of war", "the end of hunger", and "the end of poverty". We don't even talk about these bigger issues anymore.

Heck according to science fiction, robots were supposed to do the work while we were left to more constructive endeavors. Instead we seem to be heading toward where those that own the robots are (theoretically) left to "more constructive endeavors", but the rest of us are supposed to make it by hook or crook without a job (with no help from the robot owners or the government).

The only future I can figure is a very bleak one - one where the "winners" do very well and the "losers" are almost literally left to die. In short, pretty much throwing away 200+ years of gains for the little guy in favor of a feudal system again.

I think we need to ask that question again - what does the "perfect world" look like to us.

I guess when you think Jesus is going to come down and smite the Earth you don't have to much worry about that do you?
...
written by patient renter, May 12, 2010 2:13
"you have a large block of people, who won't listen to reason or logic and follow a religion of Ayn Rand"

It's important to understand where these people are coming from. It's not that government is inherently evil, it's that its powers are too easy to corrupt, as is the situation we have now across government.
...
written by diesel, May 12, 2010 2:38
patient reader, 1:13

And no one does a better job of corrupting government than they themselves. Which makes them experts, I suppose. How was it put? A Republican is a person who asserts that government can do no good; and then systematically acts so as to make that come true.
...
written by diesel, May 12, 2010 2:42
Izzatzo @ 12:02

That was really well put.

And patient renter, rather than reader, sorry for the misaddress.
When will a man or woman of labor
written by Scott ffolliott, May 12, 2010 3:02
When will labor have its chair at the table in the U S of A? When will a man or woman of labor be allowed to become the Chairman of the Federal Reserve Bank?
...
written by L., May 12, 2010 4:12
Okay so we all have a pretty good idea of what and who caused the housing bubble, what I am not
seeing is someone having a true and viable way to fix it. Um.. I believe that would take consumer confidence again, "We the people" want to know why Congress is continuting to lie to us. Do they really think that they can say "the economy is all better" go ahead and spend and people are going to do it? It is the "peoples pocket books, retirement, savings ect" that has been affected HELLO...
Are we still being provided with False and inacurate reports Sirs?. Um, no, mam,... Okay Cut
the crap and let us move on to a economic recovery plan. Why doesn't congress come up with
a federaly Insured Mortgage Insurance for convential loans with credit scores of 580-600,
up to a 85-90% LTV in non declining areas. um cash out refinances Hello. Just maybe people would elect to buy new cars..umm. pay off credit card debt...buy new homes.....okay this is sounding good. Our money back into our market...!

For those that are upside down in their Mortgages but making their payments on time, allow the homeowner to write off the loss, not the stinking bank. About Foreclosures, sorry guys, walk away from the deal, you have probaly already lived there for the majority of a year
without paying anything. Let the investor recoup their losses and enable our economy to recover itself. Go rent a house!!The next thing...THE BIG BOYS NEED TO BE HELD ACCOUNTABLE...for this mess. Increasing consumer confidence in our market. Kinda like that do unto others as you would have them do unto you, and if you cannot play nice guys, get out of the game.
Honestly
written by Matt, May 12, 2010 4:16
Honestly, it's the media more than the politicians. There simply isn't enough push from the media against the Conventional Wisdom (apology for status quo). How is a politician supposed to make a difference, when the media can't even present basic facts?
...
written by mmckinl, May 12, 2010 7:05
The deficit is a problem ... and we do need to spend more for public projects ... Baker eludes the real answer ... higher taxes on corporations and the wealthy ... Here is an article that explains much of it ...

"Drop Dead Economics": The Financial Crisis in Greece and the European Union
The Wealthy Won’t Pay Their Taxes, So Labor Must Do So

by Michael Hudson

http://www.globalresearch.ca/index.php?context=va&aid=19107

Creating Demand By Thinking Out of the Box
written by Steve, May 13, 2010 1:42
I agree completely with the fact that we keep growing the deficit to try to pump money in the system to create demand that sustains the jobless rate at almost 10% or more depending where you live. I think with our current progress we will remain deep in debt with millions out of work. I still believe though this ship needs to be pointed in another direction of innovation and research and development to create new industries such as alternative fuels, New types of cars and planes. Even new types of energy effecient smart homes. We could create millions of jobs. Why isn't some of the trillions we are in debt channeled into this type of R&D to help supplement businesses that are creating the new jobs of America? It seems like billions have been given away to the banks, AIG, Wallstreet execs, why not to engineering development on new industries or supplementing manufacturers to create the new industries and future jobs.
...
written by purple, May 13, 2010 2:31
Expropriate the expropriators.
Wonderful post, Dean, absolutely wonderful!
written by bailey, May 13, 2010 7:09
Leonhardt's thrown in the towel. My guess is he has his check direct deposited so he never has to go to work.
...
written by Ron Alley, May 13, 2010 7:32
Dean,

The point is that we have the best federal government that corporate money can buy. Our last hope has evaporated with the recent Supreme Court decision permitting virtually unlimited corporate election spending. Congress will become even more subservient to corporate interests after we see the influence of corporate treasuries on the next election.

The Executive Branch, including the Obama administration, shows a dismaying tendency to advance corporate interests over individual interests in a wide range of areas from offshore oil drilling to the regulation of financial derivatives.

Why do you find it noteworthy that a Times reporter fails to report accurately when his employer, his government and even a majority of the voters and his readers refuse to speak the truth about corporate dominance of American life?
...
written by Eric, May 13, 2010 10:24
Izzatzo, my wife's cousin was gambling and understood very well that she was gambling. She and her husband don't deny this at all. They completely knew they could not afford the loan they took out, but were hoping that events would favor them. Their thinking was that even though they could not afford the home today, that someone else like them could afford maybe $50,000 more within 2 years. At some point this had to stop and it stopped about 12 months before they needed it to. My point is simply that adults control and are responsible for their own decisions. I have absolutely no sympathy for the lender in this case who had to have known the high risk involved. But having a willing counterparty still leaves the decision to engage in this activity entirely within the borrowers' hands. It seems apparent that tens of thousands (at least) of borrowers went through the exact same process of taking an unaffordable loan as a gamble. That such loans were immediately securitized and sold with very dubious ratings is an undeniable fact, but it is also not a relevent fact when considering the quality of the borrowers' decisions. Shoot, one can argue that they made highly defensible decisions in that the downside was well controlled by limiting their downpayments in many cases. But what I think is a crazy argument is that their personal responsibility is diminished in anyway by what Greenspan or Bernanke might have done.
I saw it coming
written by LJM, May 13, 2010 12:49
I don't know about the elite, but I saw it coming. I read up on the history of debt in America. It was pretty clear what was coming, because we'd been here before. There was a financial benefit for certain people to not see it coming. They wanted to squeeze the last nickle out of what they'd created before it all collapsed. I was happy to have paid off my mortgage and had no other debt when the house of cards fell. I'd already been forced out of my job on medical retirement a few years before, so there wasn't much else I could do to prepare than I'd already done. I kept one credit card and pay off the balance each month. I get cash back on that card. I wish there was a good place to put my savings to earn a decent return, like a good old passbook savings account that once paid 5.25%, but alas there isn't. That's only available to the big banks who borrow from the Fed at 0% and get 5% back in a government bond from somewhere.
...
written by Min, May 15, 2010 3:30
"People who want smaller deficits want fewer jobs"

Tell it like it is, Dean! :)
Old Keynsians die hard
written by Paul DeReno, May 15, 2010 7:17
I don't know what Baker is thinking. The deficit crises is not just an American thing. Greece just defaulted. Portrugal is staring insolvency in the face, and the central banks seem bent on blowing out their money machines. And Dean thinks that more public sector jobs is the answer?? Something like 40% of GDP is eaten by the public sector and more government jobs is the answer?? More government jobs?

Here's one alternative. Switch the currencies and let our creditor banks hold a mountain of worthless paper. We owe them dollars. Let's pay them dollars, destroy the dollars, and replace it with another currency not redeemable in dollars past (say) $10 million. We will pay legitimate foreign interests who hold our debt, but not criminal banks.
Feudal attraction
written by Edward Lambert, May 16, 2010 3:09
Milton Friedman is still very influential ... His call for limited govt is still very much alive ...
He wanted to abolish 10 of the 14 departments of the Federal govt...
http://www.youtube.com/watch?v=cl_qwo2VIlU&feature=related
(Listen at the 25 minute point of the video, he lays out the fundamental functions of govt...)

Milton Friedman wanted only
* the department of defense to protect the country,
* the department of the treasury to collect taxes,
* Department of justice and the police to oversee and enforce laws,
* Department of state for foreign diplomacy

When you look at his ideal government, it is quite similar to the governments that existed in feudalism...

Feudalism defined ...
"Feudal governments provided a way to settle disputes. Aside from that and providing some military protection, they didn't do much else. They didn't provide schools, hospitals, fire protection, or other services that governments provide today."
http://library.thinkquest.org/6105/knightsandchivalry.html

He was ultimately advocating a feudalistic economy... not because of his view of free markets, but because of how he viewed government´s role in society ...
Feudal attraction
written by /L, May 17, 2010 12:30
"When you look at his ideal government, it is quite similar to the governments that existed in feudalism..."

There is one significant difference between the old feudalism and neo-liberal feudalism. In the old one everybody had the right to exist albeit in the class and rank they were born into but still an God given right to exist, in neo-liberal feudalism you really have no right to exist if you're not profitable.
Comparing Friedmanite Libertarianism to Feudalism is Asinine
written by Paul DeReno, May 17, 2010 1:21
I have an idea. Let's ignore the cardinal facet of feudalism--serfs who were tied to the land and legally bound as servants and separated from slaves only by the right not to be sold as chattel. Then lets compare feudalism to libertarianism, which is its opposite, and say that they are the same, only because we don't like either of them. Me no like A, and me no like B = A and B are the same.

With jackassery like this, it's no wonder the country is going to hell. Maybe Canada could let us export some of these discredited Keynsians.
...
written by Mcwop, May 19, 2010 8:11
Why do those that advocate more spending to increase aggregate demand, want to cut health care spending? Don't we want to spend more on health care so we create more health care jobs?
FICA holiday
written by floccina, May 20, 2010 5:03
For those that are upside down in their Mortgages but making their payments on time, allow the homeowner to write off the loss,


They could have done that with a FICA holiday. IMO they did what they TARP instead because it cost them little and they thought it was less risky to their own jobs.
...
written by Mich, May 24, 2010 10:11
"Our deficit today is due to the collapse of this bubble. There is no dispute about this."
Well, IMHO the bubble(s) just hid the deficit the past 10~15 years. Incomes and jobs were based on borrowing. What you are advocating is a "Government bubble" to replace the previous bubbles. And, of course, the people who did not participate in the earlier bubbles have no choice this time, thank you very much.
...
written by Bklynkid, May 24, 2010 6:04
After reading thru the above trash I just have one comment to make...Look at what is happening in Europe with their liberal thinking.

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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.

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