By Michael Hoexter
Congratulations on your recent electoral victory and the hard work that you and your team put into that effort. You defeated an opponent, formidable not so much from the point of view of his political skills but more in the masses of “dark money” that were thrown against you and other Democratic candidates. You and your advisors ran a sophisticated tactical campaign that will be emulated by many in the years to come. Still, from my point of view, these tactical skills will only get the American people so far in our pursuit of happiness.
You very much deserve the title of “President of the United States” after this decisive election but I am addressing you as “Barack” and “Mr. Obama” because I want this communication to reach you, if it ever would, with some immediacy and not filtered through the insulating layers of bureaucracy and advisors with which you are surrounded as President.
Barack, you seem over the past several years to have taken as an ultimate political goal for yourself the fashioning of a “Grand Bargain” between you and the Democratic Party on one side and the Republicans on the other. This goal has the insistent quality of an idée fixe in your biography and it may very well have some interesting psychological roots about which you may write at some point in your post-Presidency. The pursuit of this idea or plan, however takes you away from your duties as President, as the head of the executive branch of the US government.
While the political power you have achieved enables you to, within limits, impose your individual psychology or its effects on the American people, the intricacies of your individual make-up are of secondary importance to the service you are supposed to provide, and have claimed you want to provide, for the American people. Your drive to put “bipartisanship” above other values has, to date, created for the American people problems which ironically bipartisanship is supposed to avoid.
For starters, let me quickly review what the Grand Bargain is supposed to entail: We are according to you and your current set of close advisors in a major crisis in terms of the size of the public debt and yearly federal budget deficits. After an era of low taxes, tax breaks and rising federal budget deficits, tax rates are supposed to go up, in particular on wealthier individuals. In “exchange” for raising taxes, supposedly a goal of Democrats, the Republicans will “get” three times the amount of cuts in social spending as the increase in taxation, in particular Medicare and Social Security as well as other government spending programs. The idea is that government must balance its budget by taking in “revenue” via taxes (this is not actually how the federal government finances itself in our era as you may or may not know) and cutting spending. The idea is that “shared sacrifice” is required to solve what is viewed to be the problem of the public debt and budget deficits.
In keeping with the title of this open letter to you, I want to discuss on the one hand the motivational side of the drive towards the “Grand Bargain” and on the other the reality side, which is ultimately more important.
It Isn’t “Grand”
I realize that you have ambitions to be a great President and that furthermore you have oratorical gifts that might enable you to achieve Presidential greatness, though I believe you have not yet achieved that goal. In pursuing the Presidency or high political office at all, one expects great ambition: it comes with the territory. The largeness of the hopes of politicians is partly functional, as politicos as individuals hope to represent a constituency and sometimes even a nation as a whole.
While I understand that you don’t seem to want to be viewed personally as “grand”, you want to do “grand” or great things and make a mark, that’s pretty clear. Besides meaning “big”, grandeur and greatness both capture the feeling of expansiveness, of boundlessness that Freud called “the oceanic feeling”. When people view the Grand Canyon or another great vista, one of the feelings that visitors experience besides the pleasure of seeing beautiful colors and shapes is the sense of having of become temporarily one with the landscape. Similarly in religion, people seek or experience “the oceanic feeling” in worship to a divinity or with a congregation that is larger than themselves. Also in political rallies and listening to great political speeches, people can also feel a similar sense of boundlessness and of one-ness with a group or the nation as a whole. Political speechmaking is in part the art of evoking the oceanic feeling in people, the sense of being swept up in a grand common mission by just listening to a politician speak. There is a feeling of transcending the self, of individual and collective “bigness” which political participation and spectatorship calls forth.
While, Barack, because of your individual make-up, the Grand Bargain may evoke in you a feeling of “grandness” and of being part of a great mission, I would submit that it is not at all a “grand” mission for a number of reasons. For one, its “grandness” does not draw from the collective “bigness” of the American people or of the best of American government, the government that instituted Social Security and Medicare, had a critical role in winning World War II, etc. The concerns that motivate the “Grand Bargain” are, to put it bluntly, narrow, tiny and also utterly mistaken in terms of the reality of money, the economy and the welfare of the American people.
The Grand Bargain that you seek serves the interests of only a few special interests, the financial services industry, by enlarging the “market” for less stable and more speculative private-sourced retirement and health insurance products, sold now and in the future by Wall Street. Both political parties, including yourself, have being acting largely in the interests of Wall Street and not of Main Street, despite your calling Wall Street bigwigs at one point “fat cats”. A little extra taxation is not going to hurt the wealthy very much but cuts in social spending and overall cuts in government expenditure (as well as the lapse of the payroll tax cut) is going to hurt ordinary Americans a great deal as well as represent a significant drag on the overall economy (explained below). Again, the extra taxation on the wealthy is a distraction and a triviality compared to your apparent commitment to cutting Social Security and Medicare, a huge boon to the financial services industry and no one else.
Without an ennobling and constructive set of tasks and a reality-based discourse, the political goal of bipartisanship in Washington is not “grand” at all. A critical problem with the reflexive impulse to bipartisanship is that the two political parties currently are better representatives of two or more segments of economically-privileged opinion rather than of the American people as a whole. It is true that people pull the lever, for the most part, for one or the other major party but real, effective choice is very limited in a “first past the post” electoral system. And, you know as well as anyone, that once you and other lawmakers reach office, the relative power of the voter diminishes even further and the power of wealthy special interests increases exponentially. The current Democratic and Republican Parties are able to compete with each other for attention and “stir up enough dust” to temporarily distract many voters from the essential distance between the concerns of official Washington and Main Street. The mainstream media outlets have been collaborating in creating the appearance of differences between the two Parties but as you have admitted on more than one occasion you share a lot of common positions with your now vanquished opponent, Mitt Romney.
Also, apparently, you are very much attracted to the notion of sacrifice and “shared sacrifice” which also might be meaningfully linked to the notion of national grandeur and greatness: one sacrifices for others to make the nation, the group or the team greater and better. You know, you are probably right that in some areas more public-spiritedness and sacrifice of individual wants and needs may be desirable. Yet you have chosen to praise and seek to impose sacrifice on others in an area where, for ordinary people, for the most part, sacrifice is gratuitous and damaging.
You and your advisors are diverting people’s natural impulses to help other people to a false and actually a counter-productive goal, reducing the budget deficit. It would be far better that Americans would, for instance, sacrifice trips in fuel inefficient vehicles, until such time that they have workable low- and zero-emissions options, than to pay more income taxes to reduce a budget deficit. Or that some Americans choose careers that are not the most remunerative but serve public needs, like teaching school, social work and sustainable agriculture, and yet can get adequately rewarded for their work. These are real individual and group sacrifices for the good of the country not phantom sacrifices for a false ideal.
The notion that it is awe-inspiring or grand to unite the two major political parties around the narrow interests of Wall Street is to make a mockery of the idea of a grand sweep or arc of American history. Or to invoke individual sacrifice and people’s desire to help to address the phantom issue of the public debt is, as you will see below, an outrageous misappropriation of people’s desire to help others. It’s a travesty of grandeur and of greatness, the grandeur and greatness you aspire to as President.
It’s No Bargain
Barack, you have said that you would ordinarily not want to cut social programs or for that matter necessarily raise taxes but you feel, as you have said in the past, that the government is “running out of money”. Therefore you are saying that you are saving the American people money by reducing government spending and/or funding that spending by increasing taxes. You are emphasizing, like almost every politician, that you are cutting “waste and inefficiency” within the government budget. Therefore, the effect of “the Grand Bargain” is supposedly to save what you believe to be a limited resource, i.e. money.
In fact, you and your advisors in this campaign for the Grand Bargain are stirring hysteria and citing outdated views on money, originating during the time of the gold standard more than 40 years ago, to create, in effect, a false crisis. In the past, you have distinguished yourself from your Republican opponents in certain matters as having a somewhat more realistic and truthful view of the world but in this matter you are either deluded and/or spreading malignant falsehoods about how government finances itself. You and your current group of advisors will not be able to substantiate these contentions about the limited supply of spending because, as a government that issues its own currency and that owes its public debt in its own currency, the US federal government cannot run out of the US dollar. There is no doubt about it; it is a fact of life.
Because of the US government’s control of the US dollar there is, as Alan Greenspan and others have pointed out, zero risk of default on the US dollar denominated bond obligations of government. If it were ever to become onerous to have a certain amount of bond interest due, the US government could instantaneously pay off all its bond obligations at near zero cost. Furthermore, the obligation to sell bonds in the amount of our country’s budget deficits is a relic of the gold standard, where governments would need to “borrow” the rights to buy gold bullion from the private sector or abroad, if government did not possess enough bullion. We can maintain this relic if we like or we can chose to alter it via a political decision-making process.
It turns out that attempting to build policy around the belief that the US federal government lacks funds is in fact “no bargain” for the American people, the American government, or the American economy. The “Grand Bargain” saves none of these groups or entities money and in fact drains it away from those that need it most when then they need it most. Spending money to the federal government is just the opposite, a virtually unlimited capacity that must be used prudently but also generously in the cause of the betterment of the American people. The whole paradigm of “saving money” or “running out of money” when applied to the US federal government is entirely misplaced and furthermore extremely damaging to the real economy and the private sector. The government spends at virtually zero cost to itself and with great latitude to control the often distant future downsides of that spending, control that is unrelated to the opinions of bond market participants about US spending policy.
Under some circumstances that are very distant from our current situation or economic trajectory, a future US federal government that spent a lot of money, far more than we currently do in relative terms, could generate some negative effects in the US economy. One risk would be inflation in the real prices of goods of which that US government would buy too much, i.e. too many dollars from both the public and the private sector chasing after scarce real goods and services. As it stands, the most important service we can offer others, our labor, is currently in reduced demand and is underpaid, so increased demand for it from the side of government will have net positive social effects. Another negative effect of too many dollars spent by this future US government might be depreciation of the US dollar below some political-economically determined level, making imported goods and foreign vacations more expensive. Depreciation of the US currency will have a stimulative effect on US industries though will “hurt” high end consumers like Wall Street financiers as well as other elites who are inordinately powerful in Washington. Finally, a government that spent a lot more than we now spend might at some point crowd out the private sector in those areas where the latter is more effective in serving the public good. As it currently stands, powerful political actors have over the past 30 years been attempting to diminish the role of government below levels that are probably optimal or effective for the well-being of our society. In summary, a much higher level of government spending might have negative effects but as it stands the positive effects of that spending outweigh the distant negatives by a long shot.
Mr. Obama, the Grand Bargain is no bargain because it attempts to suppress the deficit spending of government which is a largely unacknowledged engine of the economy in good times and, especially in bad times. The federal government is the spender of last resort in bad times but also a critical provider, in good times and bad, of public goods like education and infrastructure, the demand for which continues to go up. The currency-issuing federal government is the only spender that will not go bankrupt, so the net growth of the private sector, businesses plus households, is only possible if either a country has a massive trade surplus and/or government runs budget deficits. There are some progressives who praise budget deficit cutting at some future date and they are as misinformed as you are with regard to the aforementioned “sectoral balances” between the private sector, the public sector and what economists call “the rest of the world”. Contrary to the current “wisdom” that has no basis in the economic data, budget deficits are a part of the mechanics of the modern economy and are not a sign of moral depravity or careless spending by government.
Taxing the rich more does not provide more funds for the federal government and the offer of this by you as the focus for progressives is in no way a substitute for the cuts in spending programs for which you are pushing. There is often some confusion in this area because state and local governments do fund themselves via tax receipts and a bad economy means a fiscal disaster for these non-federal government entities. Because the federal government has the ability to create spending and money at near-zero cost, as compared to state and local governments, its deficit spending is a critical support for the economy. Federal programs like Social Security and Medicare can be funded as long as the United States exists at the same levels or at higher levels because Medicare and payroll taxes do not in actuality “fund” it; payroll taxes simply reduce demand in the amount of taxes collected.
Cutting Social Security and Medicare in whatever form you choose to package it is bad for the economy because it means seniors will have less disposable income to spend on real goods and services and will spend more on financial services with the profits going to the financial sector. Currently public supports for their retirement are administered at extremely low cost, only the real cost of the labor of officials who manage these very efficient program and not some other program or other private employment and the computer resources required to process payments and issue checks.
Taxation does drain demand from sectors of the economy and higher levels of taxation, or progressive taxation might make it possible for certain government programs to have more “room” in an economy at full capacity and full employment to offer benefits while suppressing inflation. We are not currently in an economy at anywhere near full capacity or full employment. An escalating carbon tax and a financial transactions tax are good ideas because they specifically suppress demand for harmful activities in the economy, though increases in government social spending and government spending on (zero-carbon) infrastructure would be desirable to compensate for the overall reduction in spending in the economy due to instituting these taxes. A more highly progressive income tax structure enforces greater effective income equality though it does so in an “after the fact” manner, but, federal taxes of any type do not put money into federal government spending programs. Without pairing higher taxes on the wealthy with boosting federal spending substantially, your focus on taxation of the rich as the “progressive” side of the Grand Bargain is a cruel joke upon the American people and upon the progressives who support higher taxes on the rich in itself. It is a thin gruel in compensation for cutting Social Security and Medicare.
The Grand Bargain appears to be entirely innocent of the consequences of the increasing demands on government spending in the face of disasters and mitigation efforts related to climate change. As we see from climate disasters like Superstorm Sandy, localities and states will be unable to adequately address the massive challenges ahead. We will need to build an entire new post-carbon infrastructure to combat climate change both in its causes and its effects; it is inconceivable that this could be “funded” via taxation or via user fees alone. Government expenditures of trillions of dollars in the next decades, are required to ensure that future generations will enjoy the same conducive environment, food supply, mobility, and commercial possibilities of the current generation.
Presidential Greatness in the Balance
Barack, I don’t envy you the situation into which you have gotten yourself. You have achieved the Presidency at a time when greatness is required rather than being a “nice to have” option of being President; the multiple crises breaking at the same time demand great rather than only good or mediocre leadership. Furthermore in this area of government spending and budgets, you have spoken so often using the false categories of the deficit hysterics and co-created a situation where it now makes it appear like you would be a failure to actually do the right things for the American people. You have been strapping your Presidency to an economic “bomb” as you have been striving for what appears to you to be a “grand” goal.
The “Grand Bargain” will actually weaken the overall American economy and also the public sector, the government, in which you have served for the last 8 years. You have listened too much to the Washington echo chamber and the advice of holdovers from the Clinton Administration. The Grand Bargain will via political means weaken the fiscal position of the US government and more importantly of the US household sector and real business sector. You will be repeating the mistakes of the Euro-Zone which have now induced a recession via the austerity written into the Maastricht Treaty. You and the Republican Congressional leadership will together undermine the foundation of American prosperity, knowingly or unknowingly. You have somewhere in your political career, signed on to a view of government’s role that directly undermines your role as you strive to create a legacy for yourself. You have surrounded yourself with people who do not have your best interests at heart, if among those interests you include being a great and effective President, of the stature of Roosevelt and Lincoln.
In your views on the role of government in the economy, a complete reversal is called for, where you shed these misconceptions and face the challenges of real America, of the real climate, of the real economy. Without turning away from the premises of the Grand Bargain you seem to cherish, you will in all probability not achieve the stature and positive lasting impact you might wish to achieve as President.
Michael Hoexter, Ph.D.