May 5, 2011

High Deficits were the Objective of Right Economics

James Crotty: High deficits deliberately created to justify return to 1920's capitalism.
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Prof. Emeritus James R. Crotty teaches in the Department of Economics at the University of Massachusetts, Amherst. He is a Research Associate at PERI. He's a macro economist with broad interests whose research in theory and policy attempts to integrate the complementary analytical strengths of the Marxian and Keynesian traditions. His writings have appeared in such diverse journals as the American Economic Review, the Quarterly Journal of Economics, the Cambridge Journal of Economics, the Review of Radical Economics, Monthly Review, the Journal of Post Keynesian Economics, and the Journal of Economic Issues, and in many edited collections. His research interests include: economic methodology; the implications of radical uncertainty for macro theory and policy; theories of financial markets and their implications for understanding financial booms and crises; Marxian and Keynesian perspectives on investment theory; the structure and performance of the global neoliberal economy; theories of competition and their impact on theories of macro dynamics; the financialization of the non-financial firm; and the political economy of South Korea.


High Deficits were the Objective of Right EconomicsPAUL JAY, SENIOR EDITOR, TRNN: Welcome to The Real News Network. I'm Paul Jay in Washington. Now joining us to continue our analysis of the history of the austerity debate in the United States is Professor James Crotty. He's at the PERI institute in Amherst, Massachusetts. He also is an emeritus professor and Sheridan scholar at the economics department at UMass Amherst. Thanks again for joining us, James.


JAY: So we left off part one. We were beginning to talk about Reagan and the austerity debate intensify [sic]. So pick us up from there.

CROTTY: Well, Reagan represents a critical conjuncture where we begin to--we have this decision about what path to follow and begin to follow this right-wing path, the 1920s model path. So what Reagan does is a bunch of things. One, he cuts taxes dramatically on the rich and on corporations. He attacks the unions, starting with PATCO, and throughout his administration the union representation is beginning to collapse. He picks up what Carter had started and begins to accelerate deregulation in the economy, so that businesses can do anything that they want to do. He starts the process or accelerates the process of globalization, meaning opening global borders in the United States for finance to go anywhere it wants, for US multinationals to go anywhere they want. And what this means is that capital becomes mobile. It can run away if it doesn't like what's happening in the United States. And this means that capital gets a tremendous amount of power over the working class, because it can leave the country if it doesn't like what--the deal it's getting from its unions. So Reagan also increases defense expenditures substantially. So this is kind of the new model. It looks very much like the 1920s model. It's also an environment in which money is gaining more control over the political process. So it looks a lot like 1929. So what did we get out of this model, which then was--it was--continued to be implemented by George Bush senior, and to some extent continued to be implemented by President Clinton, and then, of course, accelerated again by George Bush the second. So what we got out of this, it's a model that will do a whole bunch of things. One, it slowed growth down. So growth in the United States from 1980 to the present has been significantly slower than it was earlier. Second, inequality has increased enormously, I mean, just enormously. Maybe your viewers know the data, but the top 1 percent of the income distribution, which was, in the late 1920s, which was getting about 24 percent of income, and during the Golden Age, the New Deal plus age, was only getting 10 percent of the income in the United States, went back up till--by the time we get to George Bush senior, or even Bill Clinton, towards 23 or 24 percent of the income distribution. This is the top 1 percent. It's an era in which labor is declining, in which regulation isn't going very well, in which median family income--that's, you know, the income, the purchasing power that a family can get--was right in the middle of the income distribution, which doubled in the Golden Age, now slows down dramatically and is no higher in '93 than it was in '79. It bumps up a bit under Clinton and then bumps down again in the 2000s. And so there's--we have stagnant family income. Now, the other thing that it gets is it's a model which is designed to generate deficit. So, basically, it's cut taxes on the rich and on corporations. That's the primary, maybe the most important thing to do. And if those create deficits, that's fine. We have this starve-the-beast political theory which says if deficits are created, then this creates enormous pressure to cut government expenditures, cut social spending, cut the social safety network, cut the things that people need in the country, which is part of the 1920s model. So it's a model which is designed to produce deficits. And, in fact, it has produced deficits. The single most widely used measure of how large the burden of deficits is, how big it is, is the total government debt in the hands of the public as a percentage of gross domestic product, that is, the income flows in the country. And when Ronald Reagan came into power, that figure, the debt-to-GDP ratio, was 26 percent, which basically is nothing by today's standards. When Reagan left, the deficit was 41 percent, the debt-to-GDP ratio was 41 percent. By the time George Bush senior left the White House, the public debt-to-GDP ratio was 48 percent. So this is a model which generates enormous deficits. It's the party of the we hate deficits, but it's a party whose policies are guaranteed to generate deficits. So Clinton comes in and--.

JAY: And just to interrupt for a second. And the reason for--part of the reason for that is it creates the rationale for undoing the New Deal.

CROTTY: Yes, absolutely. That is the--the starve-the-beast theory is a theory which says that if you cut taxes enough and run up enough deficits, there'll be this tremendous pressure which will develop to slash spending. We're not going to slash defense spending, so it slashes all the New Deal spending. All the money that's spent for schoolkids and poor families and, you know, Medicaid and--that's what we're going to cut. So it's--starving the beast means shrinking the government, forcing the government's social programs, which are an enormous component of the New Deal. The deficits help. See, deficits are a winner in this drive to generate the 1920s again.

JAY: And the other part of this, freedom of American capital to move offshore, is this tremendous development of productive capacity in places like China and Brazil and India, which helps to drive down American wages. So you get a double-whammy: you undo the governnment programs, and you drive down American wages at the same time.

CROTTY: Right. And as you probably have seen recently, it turns out that US multinational corporations, which were leaving the country in the 1990s but created more jobs in America than they did abroad, since 2001 has created several million jobs overseas and has cut several million jobs in the United States. So, I mean, it's a--really, it's a heavy blow to the US economy and to US workers and to the US population.

JAY: Of course, it's a disastrous plan for an overall American economy, 'cause you keep taking real purchasing power out of the economy.

CROTTY: I think that the goal is not to improve the American economy; it's to improve the situation of corporations and the rich. That's what it's designed to do. We enter the George Bush junior era with a debt-to-GDP ratio somewhere around 33 or 32 percent--not so bad, better than it was before. And the Congressional Budget Office, which are the people who do the calculations and computations about this, project in 2001 that over the next ten years there'll be a cumulative surplus of $5 trillion. But Bush does a number of things which lead to an actual ten-year cumulative change of $4.7 trillion, right? Instead of a $5 trillion surplus, we get a $4.7 trillion deficit over ten years, which is where the problem all came from. Well, how did we get there? Well, we first got that with the Bush tax cuts, right? This is an always and ever and all the time cut taxes on the rich and on corporations. So we got tax cuts that lost, I don't know, maybe $4 trillion in revenue over the decade. We had two wars. The two wars also cost [incompr.] trillions of dollars. We then had--and Clinton bears as much responsibility as anybody for this--we had radical deregulation of financial markets, which led to an insane explosion in the financial markets system, which led to a collapse in the economy. When the economy collapsed, the government doesn't get as many revenues, and it has to spend a lot more money. That is the deficit. So that was a big component of the deficits, the creation of the deficits. So the Bush tax cuts, the wars, the collapse in the economy, and then the necessity to try to stop a depression, which led to these stimulus bills, explain where the deficit has come from. If in 2010--if none of those four things had happened, there would be no deficit. So that suggests, well, how should we solve the deficit problem? [incompr.] you'd think logically that we should look at what caused the deficit problem and then try and change that, and that would solve the deficit problem. But that would say undo the Bush tax cuts, and not just as Obama is proposing for everyone who makes under $250,000. It would make sense to undo them all, because the bottom 40 percent of the income distribution got hardly any money from that. The richest 1 percent got 38 percent of the Bush tax cut. So we should be going back to Clinton-era taxes at least, and maybe more. That's what it would suggest. We should stop the wars. They're unpopular wars. Nobody wants them. They're unjust wars. They're wars of choice. We can--if we did that, we would be in a particularly good situation. We should regulate financial markets and stop this insanity, and that would be okay. And if we could, we should get a better economic model which grew faster. So what would happen if we did all those things? Okay, what would happen? So according to the Congressional Budget Office, if we extend the Bush tax cuts or the Bush-Obama tax cuts past 2012, in a decade we'll add $11.6 trillion to our public sector debt, and the debt-to-GDP ratio will be about 100 percent. If we let the 210 tax cuts expire [sic], the cumulative deficit is only $7 trillion, and the debt-to-GDP ratio is 77 percent and holding steady. If we reduce the troops in Afghanistan, the CBO tells us, to 45,000 by 2015 from the current 215,000, the cumulative deficit is $5.7 trillion and the debt-to-GDP ratio's [incompr.] So that's what you would think would be what you probably want to do, rather than all these proposals that the Republicans and Democrats are making. There are other ways to raise revenue. We could increase individual tax rates at the top by more than the Clinton era. We could raise a lot of money that way. We could raise--by modestly increasing those rates, we could raise $1.2 trillion. If we close just 15 percent of the loopholes in the tax laws that allow individuals to pay less taxes than they should would make an increase $1.5 trillion would reduce the deficit by in a year [sic]. If we raise the effective corporate tax rate by eliminating tax loopholes for corporations, we'd get another $1.6 trillion. If we instituted a financial transactions tax, which is very popular--EU is considering doing it, a little tiny tax on the exchange of stocks and bonds and derivatives, which would affect--would have almost no impact on a normal person but would fall on all these computerized, massive speculative trading operations would save $1.5 trillion. Now, this is not a tax policy I'm proposing. I'm just suggesting that if we did that, there would be no deficit.

JAY: So I guess the point here is then you would actually have to have as your objective reducing the deficit, not beating up American workers.

CROTTY: That's right. And it also would--it's what--what would make sense, given where the problems came from, and it would eliminate this idea that we lived beyond our means and we ask too much for the government. And as Alan Simpson, who was the cochair of the president's commission on what to do with Social Security, said, it would deal with the problem of the fact that the American people, he said, treat Social Security as if it were a cow with 315 udders. He didn't say "udders", but that's what he said, that we're all just--the public is just sucking the government dry.

JAY: Yeah, well, just to end off the interview, let me quote one of the stats in one of your recent lectures, which talks about how people are sucking from the cow. Poverty in amongst the elderly in 1959 was 35 percent of the elderly lived in poverty. In 2009, only 8.5 percent lived in poverty, which has to do with the success of Social Security. So getting back, unraveling this cow means getting elderly people back into that 35 percent tile of poverty.

CROTTY: And sick people to die and children to starve and people, old people, to go cold in the winter and on and on and on. That's the beautiful model that these guys have.

JAY: Thanks for joining us, James.

CROTTY: You're welcome.

JAY: And thank you for joining us on The Real News Network.

End of Transcript

DISCLAIMER: Please note that transcripts for The Real News Network are typed from a recording of the program. TRNN cannot guarantee their complete accuracy.


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