Default was the best option. The shameful and dangerous debt ceiling deal passed into law yesterday made that clear. It is rooted in the grand bargain that the political class made in 2008: to save Wall Street and allow those in the rest of America to drown Katrina style. The plan will suck money out of a shattered economy that can ill afford it and demand sacrifice from frayed and threadbare communities that will likely not be able to endure what's been asked. Yet, it will allow the wealthiest Americans to get off Scott free and—here's the kicker—profit from the misery that the plan exacerbates.
It wasn't supposed to be this way. In 2008, Democrats were elected with the largest electoral majorities in two generations. The president may think that he was elected to change the tone in Washington, but the electorate sent him there to change direction. The American people wanted him to reorient the political culture away from advocating for the extremely wealthy few over the many.
But he is the latest in a string of presidents since the 1980s to buy into Ronald Reagan's perversion of the common interests into a set of policies that concentrate wealth for an ever-smaller number of people. By the financial disaster of 2008, we should have learned that this approach simply does not work—at least not for the 90 percent of Americans who survive on pay-based work, rather than the 10 percent who earn a living from investments. It was a reminder of a core tenet of US history: that America grows best and strongest when its economy works for everybody.
But instead of engaging in a sustained fight for a fair economy, the nation's decision making apparatus has twisted itself into another inane debate over false choices—between 1) economic calamity and 2) more measures that will help America's capital holders get even more wealth, believing that—somehow—doing so will create broad-based growth and widespread prosperity. But be clear: the discussion we've just concluded has nothing to do with the economic world in which most of us live. It was all about politics.
Full Faith in Credit
To manufacture this crisis—and thus satisfy the delusional clamoring of its base—the Republican Party linked two things that had throughout 235 years of American history remained separate: the capacity of the United States to borrow (the debt ceiling) vs. actual borrowing (debt). On a regular basis, since the beginning of the Republic, the Congress has voted to raise America's credit limit. It was done more than four times under President George W. Bush with little note and even less fuss.
Raising the debt limit has nothing to do with actually using the credit that we extend ourselves. In fact, the debt ceiling is like the charge cap on a personal credit card. Just because Mastercard or Visa raise your ability to make purchases from, say, $5,000 to $20,000 doesn't force you to go down to the mall and make $15,000 in immediate purchases. The debt ceiling is about potential borrowing not actual borrowing.
But even if the US was forced to again go out and rack up trillions of dollars in short-term expenses, as happened in 2009 and 2010, it could do so. As a result of having the world's largest economy and possessing the one currency accepted without question, anywhere in the globe, the US is unique among countries in that we can both raise our credit limit and successfully borrow enough to satisfy it. Before this debate, the US was able to ask the world for whatever amount of credit it needed and get it easily. In fact, at the height of the financial crisis in 2009, more people around the world wanted to buy US debt than were able to do so. When it comes to our debt, especially in uncertain times, with other key global currencies tottering, demand for US debt—in the form of bonds—can outstrip supply.
One key reason that markets have showed continued confidence in US debt is that unlike debt problems in, say, Greece and Portugal, US deficits are largely the result of government policy rather than a fundamental structural problem with economy. The majority of US debt since 1980 is the result of tax cuts and wars—first the Reagan tax reductions in the 1980s and his administration's Cold War build up, then the Bush tax cuts and the wars in Afghanistan and Iraq. The US doesn't have a debt problem; it has a values problem.
With a different set of values, our deficit problem could be eliminated and our debt reduced. The new debt law calls for $2.5 trillion in cuts. If the Bush tax cuts on those making $250,000 and above were allowed to expire it would raise $700 billion. Add this amount to zeroing out the wars in Afghanistan and Iraq, and it is almost equal to the entire amount of cuts called for in the law. Moreover, if Bush-era tax cuts were allowed to expire for all Americans, allowing rates to slide back to those of the boom years of the 1990s, then $3.5 trillion in extra revenue would flow to the US treasury—a sum almost equivalent to the most ambitious debt plans proposed by either party.
If the US were able to jump start the economy and restore unemployment to even modest levels—say around 7 percent—the amount of debt required in the next 10 years would shrink by 50 percent. That's because, as with individuals, increased income decreases the need to use credit. Even a moderate recovery would solve a significant part of the problem. So the entire debt conversation was both wrong and misguided. With the highest unemployment and underemployment since the Great Depression, the problem was, is, and remains jobs.
A TARP Over Our Heads
Fueled by greed and fraud of banks, as detailed at length by the government's Financial Service Commission, jobs disappeared at a record rate in the wake of the 2008 financial crisis. America's political and economic leaders convinced the public that the newly radioactive economy could only be rescued by a taxpayer-funded bailout of the problem's source: Wall Street.
Through the Troubled Asset Relief Program (TARP), ironically, those being forced from their homes were asked to underwrite the same banks and mortgage service institutions that had used potentially illegal means to get American taxpayers into dangerous loans and bad debt. Though odious, Washington's financial watchdogs said it was necessary. Then-Treasury Secretary and Wall Street alum Hank Paulson—who literally got on his hands and knees in front of then-Speaker Nancy Pelosi to beg for her support—promised TARP would pump money into financial institutions, stabilize housing prices, resurrect the economy and staunch job losses. With time, the Democratically controlled Congress came to agree that the that the interests of Wall Street and those of average Americans were one in the same.
Though signed into law by Bush, TARP was almost wholly administered by President Obama and Treasury Secretary Tim Geithner. It used $700 billion of taxpayer money, which had to be borrowed, to backstop banks. More importantly, the Federal Reserve allowed banks to use the toxic subprime mortgages on their books as collateral to access over $1 trillion in government money at little or no interest. For banks, this was free money.
But they did not use the free money to keep families in their homes or fund job-creating industries, as had been promised. Instead it went into in-house proprietary trading operations, which are basically legalized private casinos that firms use to bet on stock price movements. Tax payer-subsidized gambling on Wall Street led 2010 to be the financial industry's highest paid year ever.
Meanwhile, Americans suffered with double-digit unemployment, the lowest level of homeownership in 40 years, $12 trillion in erased wealth, and the worst economic indicators for people of color in almost two generations. The racial wealth gap grew to 20-to-1, driven by a still spiraling foreclosure crisis in black and Latino neighborhoods, while poverty and hunger hit record rates. Saving Wall Street did not save America.
Yet, we now have a debt-ceiling bill based on the same “end-of-the-world-without-passage” arguments used to push through TARP. Unlike in 2008, this mess was was conjured up from thin air, virtually out of nothing. But it served as a useful platform to push an agenda that would erode the ability of average Americans to make it while advancing the interests of an enriched, swaggering economic minority.
As with TARP, Democrats made predictions of economic Armageddon if they didn't give in to Republican demands. Government checks would stop, bond markets would be thrown into crisis, banks would be unable to lend, interest rates for mortgages would skyrocket, an already weak economy would be reeling backward with recovery unimaginable. The only way forward, both parties ultimately agreed, was to cut government spending for helping those most in need during a once in a lifetime crisis, as well as the investments required to secure equitable economic growth and a functioning society: schools, roads and bridges, hospitals, and the like. It's a giant record scratch that distorts economic fact.
The capacity to borrow money and cuts in government spending have absolutely nothing to do with each other. But the debate was never really about economic or financial principals; it was about politics.
Ronald Reagan's Democratic Party
The Tea Party may present itself as a lose affiliation of everyday populists, but it is a collection of economic elitists. Funded by the secretive billionaire Koch brothers, Tea Party Republicans believe that jobs are created only by the rich. The key to economic growth, in their eyes, is to reduce government spending and transfer any savings—through tax cuts—to the extremely wealthy. It's a bizarre formula that too many, across the capital and in both parties, believe.
The Tea Party world view is actually a slightly less intense version of Ronald Reagan's. In 1980, Reagan swept to power arguing that government was the problem not the solution. He pushed for cuts in non-defense government spending and tax cuts for the wealthy. The largest deficits since World War II ensued. He was also Wall Street's candidate and through his program of financial deregulation, which ultimately taxed income earned from work more than income from investments, Wall Street boomed.
Though economically shaky, Reagan was a political success. So much so that, Democrats adopted and implemented his economic philosophy: shrink government and transfer wealth to the private sector. The broad-based acceptance of Reagan’s philosophy by the entire political class is the real economic problem. Unknowingly, many Democrats have bought into the underlying dogma of the Tea Party even as they abhor its most extreme manifestation, borne out in the Tea Party insurgents elected in 2010.
With Democrats having long ago ceded the basic philosophical ground to Reagan and his progeny, what took place this week was essentially an argument among people who agree. Half of the Democrats in the House and almost 90 percent of the Democrats in the Senate voted for the debt law.
Though the Tea Party is factually challenged when it comes to the relationship between debt, deficit, and jobs, their ideology—and the grassroots power that goes into it—adds momentum to this larger philosophical shift by the elites of both parties. The debt ceiling “crisis” and the debt law, like the TARP before it, were only the latest turn in a shrinking conversation about America’s economic future.
But having met their broader political objectives with its passage, the economic one remains a conundrum for Washington's leaders. Dressed up as a debt reduction plan, the law actually does next to nothing to shrink the country's sea of red ink. Strangely, it requires the US to reduce government spending by the estimated increase in the nation's credit limit. It's like cutting household expenses by the amount that your charge limit has increased on a credit card. All this does is ensure unnecessary pain for no reason.
The fact is, the new debt law of the land now shows just how bankrupt the political system has become. And it leads those who advocate for an economy that works for everyone to consider the unthinkable: that default may have been the better option. With default would have come widespread economic distress so unfathomable that even financial planners and hedge fund managers could not determine a way to avoid it. The consequences would have been disastrous. But at least they would have been shared by everyone.
The wrong-valued approach by Washington in this fabricated debt “crisis” reveals that we are way beyond a question of what’s right economically; we are left with what’s fair socially in a democracy. And it simply is unconscionable that the many suffer while a few profit. That's what was enshrined in the debt scheme cobbled together by a Republican Party held hostage by the rabid Tea insurgency and facilitated by a President all too ready to ditch principle in the name of peace. He got neither—and the great majority of Americans got the shaft.