With the impending "fiscal cliff" upon us, there seems to be fresh worry and general gnashing of teeth over the economy again. At times like this, I think it is especially good to step back and look at the bigger picture. Keep in mind that artificial deadlines are just that, and long-term trends don't change overnight. The 'cliff' is just the latest skirmish in the battle to control what is left of a shrinking pie.
In the big picture, there are global trends and tensions that will increasingly shape our lives. Seldom is it possible to directly ascribe our problems to specific global events, but the net result of the interacting pressure is to make everything cost more in real terms; lives are harder, we will work more hours, live less comfortably, and die sooner. Here area few of the big trends I see:
These big trends spell bad news for the privileged position Americans have had for the last century. We can expect that most of us will have to reduce our standard of living and our expectations as we come to terms with our less exalted place on a more crowed and less friendly world stage. Making the changes is painful, and no one wants to pay the costs. This has already been going on for a while.
Today we have a 'debit problem' because it is easier to pretend we can consume and control world resources as we have become accustom to, rather than face the true costs. Changing global trade dynamics, costly imperial wars, a public with aversion to taxes while simultaneously demanding government services have all put the US in the debit box. This may seem like an unsolvable problem, but like many issue that have winners and losers, it just depends how you look at it.
There are any number of ways for the government to collect taxes and spend money. Most of this power is delegated to congress. Congressmen like to promise goodies to their constituents and their campaign donors, but are loath to figure out how to pay for everything. This has led to deficit spending. Now, looking for easy answers while attempting to appear tough and serious, congressional Republicans are demanding a cap on the national debt, despite the fact that the spending creating further debt has already been authorized by congress. The President and the executive branch, are supposed to collect the taxes and pay the bills. The contradictory message from congress leaves the Obama administration with quite a bit of room to maneuver. Congressional failure to extend the debt ceiling, which is the main club the Republicans are wielding, could force the president's hand to employ any of a number of "creative" yet legal funding methods to fill the treasury with funds to pay the bills.
The Federal government has the power to print money, so there is never a real question about the ability of the government to pay its bills. The only question is who should benefit from Federal money creation. Traditionally, the Federal largess is limited to big banks, where money creation is part of the process of issuing credit. This is supposed to keep things "in balance" so we have "just the right amount" of money in circulation. Needless to say, the banks are happy to use and abuse this privilege. But the Federal government could just as easily give us all a big tax holiday and pay for a year of spending using the printing press. Such a thought is anathema to those that presently have lots of dollar denominated wealth and their Republican representatives. Such an action would cause the relative value of current holdings to be diluted by the additional money injected into the economy.
Today, our money distribution system is not working very well. The wealthy have more money than they can find places to park it, keeping interest rates low, and the lower classes are broke and out of work with little to spend, so relatively little money is in circulation and the economy remains depressed. Under these conditions, a substantial injection of money into the economy would likely cause only minor inflation.
Keeping in mind, as Paul Krugman likes to say, the Federal government is an insurance company with an army. Most Federal spending goes to fund the social safety net - much going to individual people either directly or indirectly. The result of turning on the printing press would be to dilute the general value of the dollar, but then give many of those diluted dollars directly to those most in need. This would be a VERY progressive wealth transfer - so don't expect it happen!
Instead we will be told that we have to "live within our means." And indeed we have to! It is not the dollar that needs to be conserved, however, but our planetary resources. Our carbon bill, recorded at the Mauna Loa observatory, shows the ever-increasing waste load in our atmosphere. The once inexhaustible ocean fisheries and great American forests are largely depleted. Our prairies and farms are turning into green, chemically poisoned deserts, where a handful of plant varieties are grown for food, destroying millions of acres of natural habitat. The web of life that makes our planet a nice place to live is losing so many species and habitats that soon the entire biosphere will convulse with the shock.
Yes, we have to live within our means. But don't confuse that fact with arguments which allow those with privilege to retain their status on the backs of the rest of us. We will be told that we can no longer afford the social safety net, and not to expect so much from our government. The message will come from the media moguls through their organizations and from the Wall Street pundits that claim authority in these matters. The message will be that we all must pay more taxes to pay for our past debts, and if we don't like that, then better get rid of those social programs!
Keep in mind that inequality is greater in America today than it has ever been, and it is growing rapidly due to several decades of regressive tax policies and the injection of government bailout money at the top rather than the bottom of wealth pyramid. The latter effect can be seen in the recent upswing in inequality following the 2008 crisis and bailouts. No other major economy has such an enormous gap between the wealthy and the destitute than in America. More than three-quarters of all wealth is in the hands of the richest 10%, and even of that 10%, most of the wealth is concentrated at the top.
These are choices that can strongly effect how the pain is distributed. Political courage is a rare commodity. Corporate interests dominate the discussion. The progressive gains of the New Deal and Great Society have been whittled away bit by bit, with the biggest losses often coming during supposedly progressive administrations. The executive "power to pay" is enormous political leverage that the Obama administration could apply to this stalemate. This is Obama's wild card in the coming negotiations, but he has to be willing to play it or we will see the Social Security and Medicare on the chopping block.
According to Ezra Klein, maybe Obama is willing to play his wild card!
We will have to wait and see...
Divining for the true value of Gold and Silver
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Living in the city during peak housing prices