The Price of Inequality: How Today's Divided Society Endangers Our Future (36 page)

There may be a slight concern that in this era of limited credit availability for small firms, a higher tax on millionaires might reduce their
ability
to make desirable investments (simply because they would have less money
after tax
to spend). Ironically, the banks that were so amply supported in the Great Recession claim that it is not the case—good small businesses with good projects can, they say, get the money they need. According to the bankers, the lack of lending to small businesses is not due to the banks’ failure to fulfill their side of the bargain (when money was given so freely to the banks, the understanding was that it was so that they could and would continue to lend); it is due to the recession’s elimination of good lending opportunities. But even if there is a problem with the ability to invest, there are better ways of handling it than giving a blank check to the corporations and hoping that somehow some of that money will trickle down and eventually create jobs.
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Cutbacks to social insurance

When the Right is not viciously defending against even modest increases in taxes for the wealthy, those in the 1 percent and their allies advocate cuts to social insurance—both health care and Social Security (pensions) for the aged, often disparagingly called
middle-class entitlements
. The Right fought against the adoption of both of these programs. Now it’s blaming these programs for the country’s fiscal difficulties.

In its most hopeful scenarios, the Right would privatize both services. Privatization, of course, is based on yet another myth: that government-run programs
must
be inefficient, and privatization accordingly
must
be better. In fact, as we noted in chapter 6, the transaction costs of Social Security and Medicare are much, much lower than those of private-sector firms providing comparable services.
This should not come as a surprise. The objective of the private sector is to make profits—for private companies, transactions costs are a good thing; the difference between what they take in and what they pay out is what they want to maximize.
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The gap between revenues and expenditures for public programs does create problems over the long run. In the case of Social Security, the gap is probably relatively small, with a high degree of uncertainty. Social Security’s fiscal position depends heavily on forecasts of wages, population, and longevity. Economic forecasters didn’t do a very good job of predicting the Great Recession even a year before it occurred, so no one should put much credence in economic forecasts forty years out. It is even possible that the program will be in surplus, especially if the level of immigration continues at its prerecession pace, relative to the size of the population. Of course, we have to be attuned to the possibility that there will be a large long-term deficit in the Social Security program and that there will have to be changes to either contributions or benefits.

A few adjustments now do make sense: increasing the maximum income for which contributions are made (in 2011 contributions were only made up to $106,800 of income, with the result that less than 86 percent of wages were subject to the payroll tax); continuing the adjustment of the age of retirement as longevity increases (but this must be accompanied by increased support for those who have to retire early as a result of partial disability); and increasing the progressivity of the system to better reflect the increasing inequality in our society. Those at the top currently get slightly less than they contribute; those at the bottom slightly more. Tilting the balance a little more would, with the extension of the contributions to upper-income individuals, both help those at the bottom and put Social Security on firmer financial footing. In the longer run, there may have to be some additional adjustments, say, a slight increase in taxes, a slight decrease in benefits; but even in the standard scenarios the gap is moderate.
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Social Security has been an impressively successful program, which has not only almost eliminated poverty among the elderly
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but also provided a kind of security that no private insurance program can match, protecting against volatility in the stock market as well as against inflation. Many Americans who have relied on private pensions know what I’m talking about: even as government programs attempt to make sure that private pensions are adequately capitalized, firms have gamed their employees. Before the companies go bankrupt, their CEOs walk off with large pay; but the pension funds are put at risk.

President Bush’s agenda for privatization of Social Security was not about providing more money to America’s retirees or more security or about increasing efficiency. It was about one thing only: providing more money to the 1 percent at the expense of the 99 percent—more money to Wall Street. The magnitudes involved are potentially enormous. Think of the $2.6 trillion in the Social Security fund. If Wall Street could get just 1 percent per year for managing that money, that would be an extra bonanza for the managers of $26 billion
a year
.

Medicare

The issues involved with the Medicare program are more complicated, but only slightly so. America has an inefficient health care system that delivers first-rate health care to those who are lucky enough to have good health insurance or wealthy enough to afford it without insurance. A system riddled with distortions and rents, health care’s high transactions costs feed the profits of the insurance companies, and its high drug prices feed the profits of the pharmaceutical industry. There is one way to solve the long-term deficit associated with Medicare and Medicaid: make the health care sector more efficient. If the cost of delivering health care in the United States were comparable to that of other advanced industrial countries
that achieve better outcomes
, as evidenced, for instance, by longevity or infant or maternal mortality, America’s budgetary problems would be solved.
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Instead, the deficit reduction commissions and proposals on offer in 2011 either waved their hands—saying that the growth in Medicare spending would have to be capped, without saying how that would be achieved—or, as in the Ryan plan, suggested converting Medicare to a voucher program, in which individuals would be given a chit that they could use to pay for health insurance
in the private market
.
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Those who couldn’t supplement the voucher with their own money would have to make do with the best policy that they could get with the voucher. The implication was clear: if costs of medical care in general increased but spending on the aged was capped, those who could afford to pay more out of their own pocket would have to; and those that could not would have do without—for them, there would be, in effect, rationing.

Most of the reforms in Social Security and Medicare have to be phased in gradually over time, which is why these cutbacks will not have an immediate big effect on current deficit. On the one hand, that’s the big advantage: one can talk about fiscal responsibility but not crimp the economy
now
.
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On the other hand, for the true deficit hawks, that’s the big disadvantage. Talk is cheap. The Right wants real cuts in spending now,
and
a promise of future cuts in social programs. But enacting real cuts now will exacerbate the economic downturn and worsen the plight of those in the middle and at the bottom.

Blame the victim

Still another myth is that the poor have only themselves to blame. The unemployed are jobless because they are lazy. They haven’t searched hard enough.
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When faced with a proposal to extend unemployment benefits, advocates of these ideas worry about moral hazard. Providing insurance to the unemployed, they think, reduces their incentive to look for a job, which in turn leads to higher unemployment. Whether such claims are valid when the economy is operating near full employment is not my concern here. With four applicants for every job, however, it should be obvious that the problem today is not the lack of applicants for jobs, but the lack of jobs.
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If more people searched, there would just be that many more people applying for the few jobs that were available. There would essentially be no change in the level of employment.
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Standard fare among central bankers (and others on the right) maintains that it is not that
they
have failed to manage total demand to keep the economy fully functioning. Instead, they shift blame elsewhere, particularly to workers, for demanding excessive job security and too high wages, undermining the functioning of the labor market. The crisis demonstrated how wrong their views about the labor market were: the United States, with allegedly the most flexible labor market, performed far worse than countries with stronger labor protections (like Sweden and Germany).
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And the reason is obvious: cuts in wages reduce total demand and deepen the downturn.

A
USTERITY

The worst myths are that austerity will bring recovery and that more government spending will not. The argument is that businessmen, seeing that the government’s books are in better shape, will be more confident; more confidence will lead to more investment. Interestingly, on the basis of this argument, the advocates should support our first strategy for economic recovery: higher public investment. Since there are public investment opportunities that are widely believed to have very high expected returns—much higher than the interest rate government has to pay to borrow, more public investment would lead to a lower long-run national debt; and the belief that that was so should instill confidence, bringing on an even stronger burst of economic activity. But the advocates of austerity do not support higher public investment.
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Another way to consider the merits of austerity is to look at history. History shows that austerity has almost never worked, and theory explains why we shouldn’t be surprised by this. Recessions are caused by
lack of demand
—total demand is less than what the economy is capable of producing. When the government cuts back on spending, demand is lowered even more, and unemployment increases.

Underlying the myth that austerity will bring confidence is often another myth—the myth that the national government’s budget is like a household’s budget. Every household, sooner or later, has to live within its means. When an economy has high unemployment, the simple rule does not apply to the national budget. This is because an expansion of spending can actually expand production by creating jobs that will be filled by people who would otherwise be unemployed. A single household, by spending more than its revenues, cannot change the macroeconomy. A national government can. And the increase in GDP can be a multiple of the amount spent by the government.

Those in finance stress the importance of confidence, but confidence can’t be restored by policies that lead to more unemployment and lower output. Confidence can be restored only through policies that lead to growth—and austerity does just the opposite.

Austerity’s advocates present evidence of countries in a downturn that have imposed austerity and recovered. But a careful look shows that those countries were all small and had trading partners that were experiencing a boom.
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Thus, increased exports could easily replace reduced government expenditures. That is not the case today for the United States and Europe, whose trading partners are themselves in a slump.
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One might have thought that those who advocate austerity would have learned from the plethora of earlier experiences where austerity had disastrous consequences: Herbert Hoover’s austerity converted the 1929 stock market crash into the Great Depression, IMF austerity converted the downturns in East Asia and Latin America into recessions and depressions; the self-imposed and forced austerity in several European countries (the UK, Latvia, Greece, Portugal) is now having exactly the same effect. But austerity’s advocates haven’t seemed to come to terms with this overwhelming evidence. Like the doctors of the Middle Ages who believed in bloodletting, but when the patient didn’t get better argued that what they really needed was another round, the blood letters of twenty-first-century economics will not waver. They will demand ever more austerity, and they will find myriad excuses for why the first dosage didn’t work as predicted. Meanwhile, unemployment will increase, wages will decrease, and government programs upon which those in the middle and at the bottom rely will wither away.

By contrast, government spending has succeeded. It was ultimately government spending in anticipation of World War II that pulled the country out of the Great Depression. Although the New Deal provided some stimulus, and helped the economy recover between 1933 and 1936, the stimulus was not large enough to overcome the combined effect of the contraction of spending at the state and local levels and the weaknesses in agriculture (incomes of those in that sector, constituting a quarter of the population, fell dramatically in this period—by 50 percent between 1929 and 1932 alone).
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Then, at the end of Roosevelt’s first term, in 1936, worries about the deficit and pressures from fiscal conservatives induced him to cut back federal spending. The economy’s recovery was halted, and growth turned negative.
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The myth of the failed stimulus

The advocates of austerity counter those who argue for more government spending by saying that such spending will not stimulate the economy. They begin their critique by observing that the almost $800 billion stimulus package enacted in February 2009 didn’t save the economy from a deep recession—and neither would more government spending. But the stimulus
did
work: if it hadn’t been for the stimulus, the unemployment rate would have peaked in excess of 12 percent, more than 2 percentage points higher than the levels eventually reached.