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Austerity Not a Solution Pt.4 with Robert Pollin

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PAUL JAY, SENIOR EDITOR, TRNN: Welcome back to The Real News Network. I’m Paul Jay in Washington. The election’s only a few weeks away. The debate about the economy rages on. The Obama administration says slowly but surely we’re going to emerge from this recession. They say that the stimulus program has been sufficient, that there will be a recovery, we’re not headed into double-dip recession. On the other side, we’re hearing that the debt-to-GDP ratio, the stimulus spending, the infusion of what they call quantitative easing by the Fed, is creating a situation where the world’s simply going to lose confidence in the American dollar, that we’re heading towards a fiscal train wreck. And, of course, that means people’s equity in their houses, their pensions, everything will be threatened, and that, essentially, big government spending is out of control. So now joining us to talk about this debate is Bob Pollin. He’s the codirector of the PERI institute in Amherst, Massachusetts. Teaches economics there as well. Thanks for joining us, Bob.


JAY: Alright. So Peter Peterson held this conference not long ago where he had these charts and he showed us that in 10, 20, 30 years the debt-to-GDP ratio will be past where it is in Greece now, and the world will dump the US dollar, and so on. So what do you make of the train wreck theory of the American economy?

POLLIN: I think it’s wrong, in a word. Okay. Let’s just go through some of the numbers a little bit. I mean, the notion of the train wreck is that we’ve got this deficit that is completely out of control, forever will remain out of control, and the only way to fix it is to essentially cut social spending, because the two biggest items in the federal budget are Social Security and the whole set of health-care measures. That’s the essential argument. Now, we do have a big fiscal deficit at around 10 percent of GDP due to the recession. Even Pete Peterson and advocates of this kind of fiscal train wreck argument, they will even agree that once we get out of the recession, automatically on its own you will mop up about 5 percentage points of that total 10 percent of GDP. So after the recession, if you don’t do anything else, you don’t raise taxes on anybody, you don’t cut any social programs whatsoever, the real issue is we’re at a 5 percent of GDP deficit, as opposed to what we have now, a 10 percent of GDP deficit. Now, so the real question is: is a 5 percent of GDP deficit a fiscal train wreck? The answer to that is no. It’s large. It’s not a fiscal train wreck. Under President Reagan, the fiscal deficit—over the full 8 years of his time in office, the fiscal deficit was 4.2 percent of GDP. So even if we are at 5 percent, we’re not really far off from where we were under Reagan. That said, it’s not that hard to envision ways of getting that 5 percent long-term deficit down much lower, down into the range of 2 to 3 percent of GDP, which is historically where the deficit has been and is no problem whatsoever.

JAY: Before we get into that, let’s just back up one step. Getting from 10 to 5 percent assumes this is kind of a normal recession, normal business cycle, and there’ll be some growth that will diminish the debt. But what if we’re into decades of this kind of stagnation? What if this issue of lack of real purchasing power in the economy doesn’t change and there is no real recovery, what we see is just, like, you know, another 10, 20, 30 years of the way it is now?

POLLIN: Well, I think that that is a possibility. I think that before that happens we will enact some significant measures to prevent that from happening. And the one I mentioned before, I mean, there is no way that the banks are going to indefinitely sit on $1 trillion of reserves if there are policies in place that will create strong incentives for them to start lending and disincentives for them to keep sitting on their money.

JAY: If you have these austerity measures, that’s no incentive to start borrowing, ’cause there’ll be even less purchasing power in the economy.

POLLIN: That’s right, and that’s why austerity—.

JAY: But that may be where we’re at. We may—you know, right now, the austerity hawks seem to have the dominant position in both parties.

POLLIN: That is right, and that is exactly why this debate is so serious and the austerity position is so dangerous. I mean, if we allow the austerity—the deficit hawks to win and austerity becomes the order of the day, you’re right, the economy could spin into a deflation, we could have a severe double-dip recession, and then, really, all bets are off. That said, I mean, even under that scenario, if for a few years we have to ramp up the deficit spending to where it was in World War II, 30 percent of GDP, I mean, we can do that.

JAY: How do you pay for it?

POLLIN: You pay for it over a long period of time. The main way you pay for it is the way we paid for it coming out of World War II, is through economic growth. If you have economic growth, then people are making more money. Then they pay more taxes, and that enables the government to start paying down its debts. But the other way is, I mean, there are some adjustments that we could make. Number one, I mean, actually, and I don’t know that this is true, but the Medicare trust fund, in their most recent report of just a couple of months ago, in their judgment the health-care reforms, with all of its inadequacies, and there are many, but in their judgment the health-care reform that passed last spring will make a significant dent over time in health-care costs—over the long-term, not in a year or two. And so, if they’re right, I mean, half of the thing that Pete Peterson is so concerned about has been solved by the Obama health-care reforms. I don’t know that they’re right.

JAY: Let’s say that they may not be right. Where else would you go to pay for this?

POLLIN: Okay. Well, then there’s a couple of other really big places. One is the military budget. The military budget right now is at nearly—itself is at nearly about 5 percent of GDP. That’s when we’re fighting the Iraq War and the Afghanistan War that the administration promises they’re ending. Now, before 9/11, at the end of 2000, at the end of the Clinton administration, military spending was at 3 percent of GDP. So we’re up from 3 percent to 5 percent of GDP. That’s a lot of money. That’s $300 billion difference in today’s economy. So that even if we cut the military budget to where we were under Clinton—and nobody said we had a weak defense then—that alone would bring—if we say we’re at a 5 percent of GDP deficit, that alone would get us down to 3 percent, if you cut that money out of the military. But let’s say you can’t do all of that. Another place is to start taxing Wall Street. We know that Wall Street caused this crisis, so they need to pay back, number one. But number two, it’s a rational thing to do. I mean, we pay sales taxes when we go buy things in the store. On Wall Street, when they trade on their securities, they do not pay any effective sales tax. Let’s impose a sales tax on Wall Street. It would be a small tax, let’s say 0.5 percent of the value of an asset, for a stock, even lower tax rates for other assets like bonds, and you could still raise another $200 billion that way, easily. And so, through that combination, taxing Wall Street and cutting the military and controlling health-care costs, basically, the train wreck miraculously evaporates.

JAY: Essentially, you would pay for the stimulus out of those kinds of cuts.

POLLIN: Exactly.

JAY: Now, the other place where there is an enormous amount of money, obviously, is in the assets of the top two or three percentile, both in terms of not just income, of course, which does not get taxed at anywhere near the rates it used to, but also in terms of the assets they’re sitting on. Why does that not get talked about? It’s not that there isn’t enough money in the society to pay for some stimulus; it’s that there’s a complete reluctance to tax it.

POLLIN: Well, yes. I mean, we’ve gotten so accustomed to this thing that’s happened historically over the last 30 years, which is truly remarkable, which is the upward concentration of income and wealth, which people don’t realize how severe that has been. I mean, basically, the US economy right now is at a level of inequality equal, interestingly, to the year 1929. We know that year. That was the Wall Street crash that led to the 1930s depression. After 1929, because, of course, rich people lost all their wealth, the economy became much more equal and stayed that way roughly until the 1970s, and essentially early into the 1980s. And then, when Ronald Reagan came in as president, and ever since then, the upper 1 percent, the upper 0.1 percent, are grabbing remarkable shares of the national wealth. For example, the top 0.1 percent, their share of income has risen from 30 years ago from about 3 percent to 10 percent. So that’s all stuff that could be taxed. I mean, they’re doing extremely well, and we can tax it. And you know what? They’ll still be doing extremely well.

JAY: Well, I think the big point there is a lot of that money simply doesn’t circulate.

POLLIN: That money is the money that’s going into the Wall Street hyperspeculation. So the more that you tax that, that’s another way to bring more health to the economy, by channeling into productive things. I mean, why not pay for school teachers, health care, day care, public safety? And the rich people will still be rich. They’ll just be slightly less rich than they are relative to everybody else.

JAY: ‘Cause I guess what’s happening now, especially with this kind of derivative gambling, one billionaire bets against another billionaire, the only circulation that happens with the currency is some money moves from one billionaire to the other. It actually never moves back into the real economy.

POLLIN: Well, it’s not just between those two billionaires, because there’s layers and layers of traders and agents that all take their cuts. And that was exactly what was happening with the mortgage-backed securities markets, because, you know, you start out with, you know, these mortgages in low-income neighborhoods, and then somebody bundles them up and sells them in the financial markets. They get a fee. And then somebody bundles them up again and figures out, well, we can make these into low-risk securities; let’s give them a AAA rating. They get a fee. And then, once they all have fees, then you package them up again. And so everybody has to get their fees, and that’s what has happened, and that’s what brought down the financial markets.

JAY: Okay. One more segment. Let’s talk about who benefits from austerity. If austerity isn’t a real solution, then why do the hawks want it? Please join us for the next segment of our interview with Bob Pollin on The Real News Network.

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Robert Pollin is Professor of Economics at the University of Massachusetts in Amherst. He is the founding co-Director of the Political Economy Research Institute (PERI). His research centers on macroeconomics, conditions for low-wage workers in the US and globally, the analysis of financial markets, and the economics of building a clean-energy economy in the US. His latest book is Back to Full Employment. Other books include: A Measure of Fairness: the Economics of Living Wages and Minimum Wages in the United States, and Contours of Descent: US Economic Fractures and the Landscape of Global Austerity.