James K. Galbraith: Is there a looming crisis of debt or deficits such that sacrifices in general are necessary?
James K. Galbraith teaches at the LBJ School of Public Affairs, The University of Texas at Austin. He is a Senior Scholar of the Levy Economics Institute and the Chair of the Board of Economists for Peace and Security. The son of a renowned economist, the late John Kenneth Galbraith, he writes occasional commentary for many publications, including Mother Jones, The Texas Observer, The American Prospect, and The Nation. He directs the University of Texas Inequality Project, an informal research group based at the LBJ School, and is President this year of the Association for Evolutionary Economics.
Paul Jay, Senior Editor, TRNN: Welcome to The Real News Network. I’m Paul Jay in Baltimore.
The fiscal cliff is a scam—so says Professor James K. Galbraith. And he’s written an article which goes through the six reasons he thinks it is such a scam. And we’re going to start, as we speak, a six-part series where we go through each of his reasons. And he now joins us.
Professor James K. Galbraith teaches at the LBJ School of Public Affairs at the University of Texas at Austin. He’s the author of The Predator State, and the latest among his many publications is Inequality and Instability: A Study of the World Economy Just Before the Great Crisis. Thanks for joining us, James.
James K. Galbraith, LBJ School of Public Affairs, UT Austin: My pleasure, as always.
Jay: So just before we start with reason number one, just give us sort of the overall headline why you think the fiscal cliff is a scam. Certainly the media is stampeding us with fear about what’s going to happen.
Galbraith: Well, what I wrote was that it is a crisis that was contrived a year ago as a deal, part of the deal to permit lifting of the debt ceiling. And these deadlines which were set up for the end of this year were established so as to create a climate of crisis in the period after the election, when things could be done that would no longer be immediately subject to the kind of public debate that you get before the election. And so we’re now in this period.
It was clear from election day that a massive wave of public relations was being brought to bear on this. You can read the op-eds that appeared in The Wall Street Journal and The New York Times on election day on that point. And now we’re in the middle of it. And the claim being made is that if there isn’t a decision taken by the end of this year—which effectively means, really, in the next three weeks or so—that very bad things will happen to the economy.
And, of course, it isn’t true. The reality is that while there will be changes that—in tax rates, for example, that will take effect on January 1, the impact of those changes on economic activity will be very slow, very gradual. And the Congress coming in in January will have plenty of opportunity to mitigate, eliminate those effects if it chooses to do that. And it can set the whole business back retroactively to the first of the year. So if there isn’t a—if the crisis, so-called crisis simply passes with no legislative action this year, nothing very serious will happen that can’t be fixed in the first six weeks or so of next year.
Jay: Now, you’ve written that the computer modeling that is being presented to us isn’t correct. We’re being told that this is tremendously recessionary and/or doesn’t deal properly with the debt. And we saw an interview with the head of Goldman Sachs on 60 Minutes, who says the fact that all this has—the economy has such a question mark over it is paralyzing investment. You don’t buy this.
Galbraith: The notion that this is being—that the condition of the economy has been driven by uncertainty that can somehow be resolved by an act of Congress in the next three weeks is, of course, the last refuge of a very first-class scoundrel.
What’s true here is that if you allowed major increases in tax rates on the middle class and on working people, because the payroll tax holiday will expire at the beginning of the year, if you allow all of that to continue to bite for six months or a year, then it would begin to squeeze people’s consumption and you would have a significant effect on total demand by the end of the year. And that’s what the Congressional Budget Office said, and I think it’s a fair point. But there is absolutely no reason to believe that you need to act by December 21 in order to avoid that effect. If you acted by January 31 or February 15, you would mitigate that effect in plenty of time.
Jay: So the point you’re making is this doesn’t have to be done in the midst of crisis and hysterical mentality.
Galbraith: Right, and there is a reason—there are two reasons why the pressure is on to do it in an atmosphere of crisis. Reason number one is that the Congress will be significantly more Democratic next year than it is this year. The Senate will have two extra Democratic votes, and the composition of that majority will be significantly different and substantially more progressive in important ways.
And secondly, there is clearly a desire to put into law now, in this Congress, long-term changes in Social Security, Medicare, and Medicaid. That was the agenda of the people who designed the fiscal cliff: okay, well, we’ll set up a crisis, and at the end of 2012 we’ll come in with these changes. And that might be, for example, curtailing the cost-of-living adjustments in Social Security, raising the age of eligibility for Medicare, any number of things which in effect would cut benefits, or, in the case of what I just said about Medicare, basically a partial privatization, forcing people to rely on private insurance for a couple of extra years. So that’s what was being held in reserve for the post-election period.
And the danger remains is that at the end of this Congress we’ll have in the last few days some concession on the Republican side on the tax issues, and the Democratic leadership will come in and say, and specifically the White House will come in and say, well, now we’ve got what we want on taxes; we need to make a concession on Medicare and Medicaid.
I think Social Security’s been taken off the table for the moment. We may have won that battle. But I’m still concerned that what may happen to our very important health insurance programs, totally unnecessarily, will be kind of folded in as a kind of necessary concession at the end [crosstalk]
Jay: Well, we’re going to talk more about this part in part two of this series of interviews. But in the article you wrote, you talk about the CBO revising its own forecasts. And what was that about?
Galbraith: That has to do with these longer-term deficit forecasts, which have been part of the climate of preoccupation with the deficit, the national debt, all along. And one of the ironies of the situation we’re in now is that the fiscal cliff is actually a reduction in deficits, and the same people who were telling us that we need to be frightened about the long-term deficit are telling us that we need to be frightened about too small a short-term deficit [incompr.] could easily understand why for the larger public this is just a tiny bit confusing.
But those long-term CBO forecasts of very rapidly rising national debt, very rapidly rising deficits, rest on a couple of very doubtful assumptions. One is that health-care costs will continue to rise more rapidly than every other cost in the economy forever—can’t happen and won’t happen, but that’s—you can build a computer forecast that makes it happen, in which it happens. And the other is that the interest rate that the federal government pays on its public debt will be raised by the Federal Reserve, let’s say, four years from now, to a point where it’s higher than the growth rate of total output, the growth rate of income, and then that interest burden compounds, the interest payments compound as a share of GDP and go up very rapidly after that. If you stretch out that forecast long enough, you can get a debt-to-GDP ratio as high as you like in a computer projection. But once again, it will not happen in real life. It’s not consistent with the way an actual economy is going to function.
Jay: So, again, an artificial sense of urgency being created.
Galbraith: An artificial sense of urgency about events that are 30 or 40 years off. It’s a very strange situation.
And we have obvious pressing problems—unemployment, foreclosures, energy, climate change. We have clear things that should be at the top of our priorities. And instead you have this preoccupation, obsessive preoccupation with computer projections which are easily—let’s say, easily rebutted and which in any event, you know, are making statements about events that are highly conjectural and very far in the future.
Jay: Okay. In part two of this series of interviews, we’re going to ask: is there a looming crisis with Social Security and Medicare and Medicaid? So please join us for part two of our interview with James Galbraith on The Real News Network.
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