The Sequestration Blues: Part 2 Pete Peterson Creates a CrisisPosted: February 26, 2013
Ben Bernanke joined the chorus of economists concerned about the impact of the sequester on the sluggish recovery. This is not the first time the Fed chair has commented on misguided and dysfunctional Fiscal Policy in our country.
Federal Reserve Chairman Ben Bernanke warned Congress risks slowing the economy by allowing $85 billion in automatic spending cuts to be triggered on Friday, arguing they should be replaced with more deliberate, long-term cuts.
In prepared testimony for the Senate Banking Committee, Bernanke argued the sequester would pose a “significant headwind” to the economic recovery.
“Given the still-moderate underlying pace of economic growth, this additional near-term burden on the recovery is significant,” he warned.Bernanke did not offer an opinion on whether tax hikes should be included as part of a replacement bill, and he did not call for any specific entitlement reforms.
Meanwhile, the White House released reports on how the expected cuts will impact states. This undoubtedly will trigger more Republican whining on how mean the President continues to be to them as they continue their role as economic agents of chaos.
In Kentucky, home of the Senate Republican leader, Mitch McConnell, residents woke up on Monday to news articles like these: Widespread government spending cuts that begin on Friday will cost 21,484 jobs in the state. A construction project at Fort Knox will come to a halt. Three airports may endure partial shutdowns. Nearly $12 million in grants to public schools would be cut, putting at risk the jobs of 160 teachers and aides. More than 1,000 children would lose access to Head Start.
The White House released warnings for every state on Sunday in the hope that angry voters would besiege Republican lawmakers like Mr. McConnell and the House speaker, John Boehner, to stop the $85 billion in cuts, known as a sequester. President Obama wants to replace the sequester with a mix of tax increases on the rich and less damaging spending reductions. Republicans say they won’t consider any proposal that isn’t all cuts, so the sequester is all but certain to begin this week.
There’s a fairly good list of the types of spending items that will be subject to cuts at the Bipartisan Policy Center.
Setting aside the magnitude of the reductions, the most difficult aspect of both the defense and domestic cuts is that they will be made across the board to all non-exempt government spending regardless of programs’ merits or demerits.*** The reductions designed by law are executed at the Program, Project & Activity (PPA) level of the federal budget, sometimes defined in appropriations bills and which often includes very granular categories of expenditures, such as “two Virginia Class Submarines” or “salaries and benefits” of a particular agency.
Absent a new law passed by Congress, the president has little ability to spare one type of spending and cut more from another. This creates uncertainty in both the public and private sector because there remains much to be determined about how PPAs will be defined by agency administrators and how the cuts will be implemented. This inability to plan is already acting as a drag on economic growth.
Furthermore, the immediate and across the board nature of the cuts, along with their magnitude concentrated in a seven-month period, will impair economic growth as the year progresses. At BPC, we estimated last year that the sequester would reduce 2013 gross domestic product (GDP) growth by half a percentage point, and would cost the economy approximately one million jobs over the next two years. More recent estimates released by the CBO and Macroeconomic Advisors have roughly confirmed these projections.
Given all of this, you would think that most congress critterz would want to avoid the sequester. However, there’s that same group of tea party crazies that are so disconnected from an evidence-based reality it appears congress will tank the economy rather than develop a cogent Fiscal Policy related to economic theory and the state of the economy itself.
The White House strategy on the sequester was built around a familiar miscalculation about Republicans. It assumed that, in the end, they would be reasonable and negotiate a realistic alternative to indiscriminate cuts. Because the reductions hurt defense programs long held sacrosanct by Republicans, the White House thought it had leverage that would reduce the damage to the domestic programs favored by Democrats.
It turns out, though, that the defense hawks in the party are outnumbered. More Republicans seem to care about reducing spending at all costs, and the prospect of damaging vital government programs does not seem to bother them. “Fiscal questions trump defense in a way they never would have after 9/11,” Representative Tom Cole, a Republican of Oklahoma, told The Times. “But the war in Iraq is over. Troops are coming home from Afghanistan, and we want to secure the cuts.”
Cuts this draconian have no place in a tottering economy. But, realistically, the only way to break this standoff is for the cuts to exact their toll on daily life, causing Republicans to face pressure from the public to negotiate an alternative plan with higher revenues in March as part of talks to finance the government for the final six months of the fiscal year.
It’s difficult to believe that so many folks can be so misguided about the need to drastically cut the budget. However, it’s partially the result of an astroturf project called “Fix the Debt’ that has been financed and developed by whacko Pete Peterson. We’ve seen many in the press fall for the propaganda.
Voters sent the deficit scolds packing. Economists warned that austerity during an economic downturn was a recipe for disaster and polls consistently showed that jobs were America’s top priority with the deficit trailing well down the list.
To overcome this wall of opposition, Peterson needed a new strategy. For years, he had funded think tanks, seminars, national tours, town hall meetings, TV ad campaigns, college TV, school curricula, online media and even a motion picture — all in an effort to convince America that deficits would one day sink the economy. Now Peterson needed something bigger and better than before — and the Campaign to Fix the Debt was born.
Peterson rallied the crème de la crème of the 1% to his cause. Hiding their self-serving motives and wrapping themselves in patriotic language of “shared sacrifice,” 127 CEOs have signed up to his Campaign to Fix the Debt. Accompanied by elder “statesmen” (many of whom have gone through the revolving door and have undisclosed financial ties to firms that lobby for tax loopholes and other corporate welfare that contribute to the deficit), plus four PR firms, 80 full-time staff members, 23 phony state chapters, and a raft of Peterson-funded “partner organization,” Fix the Debt has targeted a budget of $60 million in “the first phase.”
Key to the strategy is ginning up a crisis. In lockstep, the CEOs, politicians, and partner organizations stormed the media last fall warning of the looming disaster of the so-called “fiscal cliff.” Breaching the fiscal cliff “will lead to chaos,” warned Erskine Bowles; “derail the fragile recovery,” said Goldman Sachs CEO Lloyd Blankfein; generate a “shock to the financial markets and a painful return to the recession,” said the CEO of Morgan Stanley.
But this chorus of calamity was pure hype. One Fix the Debt steering committee member, former Tennessee governor Phil Bredesen, let slip that the strategy was to create an “artificial crisis” that would force Congress to act.
Economist Dean Baker explains how Peterson’s obsession has turned a lot of people into basic math dunces.
For all the debate, the facts on the deficit are not really debatable. We had a very modest deficit in 2007, before the collapse of the housing bubble sank the economy. The deficit that year was 1.2 percent of GDP, and it was projected to stay near 1.5 percent well into the current decade, even if the Bush tax cuts were not allowed to expire. The debt-to-GDP ratio was actually falling; we could run deficits of this size forever.
The deficit expanded enormously in 2008 and peaked in 2009 at 11.1 percent of GDP. But this wasn’t caused by some extravagant spending spree or an orgy of permanent tax cuts. It was caused by the fall in tax collections that occurs every time the economy goes into a downturn, coupled with the increase in spending for countercyclical programs like unemployment insurance and food stamps. There were additional spending and tax cuts associated with President Obama’s stimulus plan. But the overwhelming majority of them were explicitly temporary, and the impact on the deficit would be negligible by 2011.
The large deficits of recent years are not an accident caused by recklessness or irresponsibility; they’re a deliberate policy aimed at supporting the economy. We designed a tax code that collects less revenue when the economy shrinks. And we have programs like unemployment insurance that pay out more benefits when a shrinking economy causes people to lose their jobs. The resulting deficits are meant to fill the gap in demand created by the collapse of the housing bubble, which caused residential construction to fall by more than four percentage points of GDP. This is more than $600 billion a year in today’s economy.
Similarly, the $8 trillion in bubble-generated housing equity led to a consumption boom, with the savings rate pushed down to nearly zero. Now that this equity has disappeared, the savings rate has risen to a more normal level of close to 4 percent of disposable income. This higher level of saving has cost the economy more than $400 billion in annual consumption demand. In addition, the loss of tax revenue from the collapse of the housing bubble and resulting downturn has forced well over $100 billion in state and local government cutbacks.
It is this gap in demand of more than $1 trillion that we are trying to fill. We can love the private sector to death, but people will not consume more just because happy Republicans are smiling at them. Nor will firms invest more when they see no demand for their products. In fact, investment in equipment and software is almost back to its pre-recession share of GDP, which is impressive given the large amount of excess capacity in the economy.
There is no plausible story whereby private demand would increase if the deficit were to shrink. Over a longer term, we can look to have net exports fill this hole in demand as the trade deficit moves closer to balance. But that will not happen tomorrow, and the process will not be hastened to any substantial degree by a lower budget deficit.
This means the people who want to reduce current deficits want slower growth and higher unemployment. They may not know it, but that is the implication of their position taken to its logical conclusion. This makes it indefensible; if someone spreads gasoline all over a barn and tosses a lit match on it without understanding the implications, it hardly affects the outcome.
This is what makes the deficit hysteria seem like a sham to those in the know. The numbers do not support their story. Pete Peterson is a deficit financier who must have a large number of investments set to pay on a broken US economy. You would think the SEC would investigate his holdings based on his scaremongering.
Peterson wants to loot Social Security. For decades he has warned of a “Pearl Harbor scenario” in which spending on Social Security and Medicare causes an epic economic meltdown. Fix the Debt is only his latest project pushing the message that the deficit poses a “catastrophic threat,” and the media have been content to echo his warnings. But people should know better than to be frightened by this chorus of calamity. Peterson is no master of prediction when it comes to economic crises. When an actual threat to the economy—the $8 trillion housing bubble—loomed ominously overhead, Peterson said nothing, even as credit markets froze, subprime lenders filed for bankruptcy and economists like Dean Baker shouted from the rooftops.
The housing crisis provides a good window into the way Peterson operates. In 2007, Blackstone owned the Financial Guaranty Insurance Company, the world’s fourth-largest insurer, which had branched out from municipal bonds into home-equity securities and subprime mortgage debt. FGIC went belly up in 2010, but by that time Peterson had sold most of his shares in a Blackstone IPO that netted $4 billion. Again, Peterson left others holding the bag. The AFL-CIO had warned the Securities and Exchange Commission that the Blackstone IPO was riddled with problems: the firm was structuring itself to avoid regulation and its real assets and values were unknown. Perhaps Chris Cox, George W. Bush’s man at the SEC, should have listened. A year later, Blackstone’s value had dropped 40 percent. Today, it is trading at $18 a share, showing no signs of the recovery that other Wall Street firms have enjoyed.
Blackstone shareholders may have been miffed, but Peterson walked away with $2 billion (on top of the fortune he already made from the carried interest tax loophole, which allows fund managers to be taxed at 15 percent rather than the standard 35 percent)—and pledged to spend half of that to convince Americans they have to take a harsher route to prosperity.
Pete Peterson is fond of drawing moral authority from his dad, a Greek immigrant who spent much of his life running a twenty-four-hour diner in Kearney, Nebraska. He says he wants to “preserve the possibilities of the American Dream” for future generations. But this former Nixon man turned Wall Street billionaire is quite comfortable with corporate welfare for the rich, and not at all happy when the 99 percent benefit from the programs they pay into with every paycheck.
Even before Fix the Debt, Peterson launched a massive effort to prop up the Simpson-Bowles commission and its $4 trillion austerity package, a plan that would “destroy Social Security by stealth,” according to Strengthen Social Security. He bankrolled nineteen “America Speaks” town hall meetings to inform the commission’s deliberations, launched the “Owe No” TV ad campaign weeks before recommendations were released, and bankrolled the Concord Coalition’s “Fiscal Solutions” tour to take the message to the heartland. When the commission blew up, Peterson gave Alan Simpson and Erskine Bowles a new perch at the Committee for a Responsible Federal Budget.
The President continues to frustrate this attempt by the 1% to get at more of the public’s assets as well as the small amount of wealth left to the bottom 99%. This is driving the group crazy. The results of the election were a huge rejection of deficit hysteria. Many Pressketeers are reinforcing the Peterson memes and blaming the president for not playing fairly when he points out exactly what austerity will do to the country. What’s worse, is the President frequently offers up much of the same crap just to arrive at a solution.
Whether or not you agree with it, and whether or not it will work, President Obama’s strategy on sequestration is perfectly obvious. His goal is to end the automatic budget cuts, which he regards as stupidly constructed and likely to harm the economy, and replace them with a long-term deficit reduction deal, balanced between cuts to retirement programs and closing off tax deductions. His plan to win involves isolating the unpopularity of both sequestration and the Republican Party’s goals (especially its refusal to raise taxes on the rich) in order to force the opposition to compromise.
The whole drama, then, lies with the Republicans. And deciphering the GOP strategy is as mysterious as gaming out the plans of a tiny band of warring clans in some mountainous region of Afghanistan. Nearly everything about them is almost completely inscrutable to outsiders. What is the party actually hoping to accomplish in the end? How do Republican leaders think they will arrive there?
Deepening the bafflement is that the Republicans’ apparent approach bears no relation either to political reality or to the party’s stated goals. President Obama is offering up something — hundreds of billions of dollars in cuts to Social Security and Medicare — that Republicans say they want and which (because of their unpopularity) they have proven unable to obtain even when they have had full control of government. They are instead undertaking a public showdown against a figure who is vastly more popular and trusted, who possesses a better platform to communicate his message, and whose message itself — spread the pain among rich and middle class alike, don’t cut retirement programs more deeply than needed in order to protect tax loopholes for the rich — commands overwhelmingly higher public support.
The overall dysfunction within the Republican party and its slave status to key groups like religious nuts and deficit nuts has led us to a place where we’re actually seeing policies shoved forward that damage the country. How this actually plays out is going to be interesting but devastating. I’m torn between grabbing bowls of popcorn and burying my savings in the backyard. All I can say is stay tuned for more insanity. I’m thinking it’s about time Good Cop Biden goes into the fray while Bad Cop Obama keeps up the PR.