The Irrationality of Regressive Budget Cuts

I recently delivered the opening address at the Economists for Peace and Security Symposium on the Crisis in the States and Cities, held in Washington, D.C. on April 12th, 2011. The following is a transcript of those remarks...

We meet today at a moment when the normally useful distinction between sense and nonsense seems to have disappeared on a bipartisan basis. All around us key points of principle have been given up. The political struggle is over what to cut and what to save, over how to bargain, and not over what to do.

In economic policy, magicians and necromancers have taken charge, brewing a toxic vat of program cuts and deregulation, from which they promise that, somehow, jobs will emerge. Serious people cite serious people on the subject of what serious people permit themselves to think. Meanwhile, the crisis in the country deepens, and hopes for a coherent strategic response to it recede.

You can see this in the content just revealed of the latest budget deal, which -- as we increasingly face an environmental challenge and an energy crisis -- targets the Environmental Protection Agency and the transportation system. And in the service of what? Deficit control and debt reduction. On this subtle, technical and deservedly obscure topic, today everyone is an expert because everyone adheres to the one true thought. We are witnessing one of the greatest waves of mass hysteria of all time, the fruits of one of history's most intense and successful propaganda campaigns.

As a professional economist and one with a background in political work -- I was here on Capitol Hill for many years, worked for the Congress -- I am impressed. I am even in awe. Practically every avenue of debate has been closed off. And not by argument. Not even, as was the case 30 years ago when a few of us tried to stand in the way of the juggernaut of the Reagan economic policies, not even by the convinced philosophical positions of effective public intellectuals. But rather by endless repetition of the same slogans, repeated and barely detectable changes in the foundation of the argument, and silence in the face of criticism. That there are many economists, experienced people, impeccable credentials, who don't buy the line, that history and comparative experience contradict it, is a secret to most people. We are hidden in this discussion behind a wall of invisibility.

Now I am not excessively worried at the moment, to be frank, as an economist by the recent rounds of short-term budget cuts. The lost income, after all, will be offset by falling tax revenues and increasing unemployment insurance, applications for disability, and so forth. And so the overall effect on total income will not be that large, just as the effect of the financial crisis was not that large. The deficit will not decline very much, and things will go on much as before. The regret here is that in most cases, we needed to do what we are not going to do. The environment and transportation are good things, even if an extra engine for a fighter aircraft can be dispensed with. It's merely foolish to give these things up on the pretense that you are accomplishing something, when you're not.

What worries me more is the prospect -- which I think hangs over us all -- that there will be a bipartisan compromise on so-called "long-term deficit reduction," the issue which even people who think themselves to be sensible and progressive concede must be dealt with, and that this compromise will do irreparable damage to the well-being of large parts of the American population, to what remains of the basic social infrastructure supporting what remains of the American middle class -- Social Security, Medicare and Medicaid.

And for what?

The idea that there is an economic rationale for dismantling these most successful and effective social insurance programs, that have performed well and efficiently, with very low administrative costs, for many decades -- close on to 70 years in the case of Social Security; since 1965 in the case of Medicare... the idea that the capital markets, for example, demand such an overthrow of these institutions is plainly absurd. The capital markets tell you every morning at what rate they are prepared to lend to the government of the United States for 10, 20 and 30 years into the future. And if people who have money, have their own money on the line, were seriously worried about the prospect that the United States government could not service its debts, or the prospect that the United States dollar will fall victim to a massive inflation, they would not be willing to lend to the United States government on the extremely favorable terms that everybody can see are now available. There is something wrong with this story.

And the idea that we should frame policy around a set of computer forecasts, produced even by so lofty and irreproachable an organization as the Congressional Budget Office when the capital markets don't take these forecasts seriously, and when anybody examines them, as very few people do, can see they are internally inconsistent and not reflective of any history of our economy, is even more absurd.

Meanwhile, it's out in the country, and out in our states and our cities, that the immediate consequences of this policy environment are being felt. I live in Texas, and in my home state -- which is far from being the worst affected by the financial crisis and the recession -- my daughters bring home from school reports of the teachers in their public schools who will not be there next year, who have been laid off because the school district is facing a massive budget shortfall.

What will that do? Of course, it will degrade the quality of the public programs that my children, many children, are in. What will the teachers do? Well, they will apply for jobs in the private schools to which middle class parents will feel forced to flee. And they will be hired and they will teach what they taught before, but for lower pay and at higher cost. This is supposed to be an economic improvement? Someone should explain to me where it comes from.

We are seeing cuts in Medicaid, which I am told by nurses will produce closures of nursing homes. And what will people in those homes do? Many of them don't have another place to go. So, of course, they will go to the emergency rooms and they will end up filling hospital beds. And guess what? This will be very good for the economy, because the hospital beds are much more expensive than the nursing beds. Hmm?

And I ask you, Where is the rationality in this? Where is the sense of organized purpose? Where is the goal of improving the performance of our economy? Or the living standards of our people? It is nowhere to be seen. In the rush to achieve things which are driven by some metaphysical notions that have become attached to accounting concepts.

And of course, looming over these issues, is the ugly question of power. The question really, which we have so vividly seen played out in the state of Wisconsin recently, but present many places in the country, of whether public servants -- public employees -- in this country have any rights to negotiate the terms of their employment.

Is there hope? I suggest that there is hope only if some of the people who we have assembled today are finally heard from, and if the proposals that they will be offering at this symposium are able to reach out and find a base of support in the country, if their voices can cut through the fog of propaganda and, really, of indifference to what is happening in the country that clouds so much of our policy dialog today. It is not an easy task.

... but as was said 50 years ago, Let us begin.

Cross-posted from New Deal 2.0.