Thursday, July 7, 2011

Is Obama Serious?

The news in this morning's paper was not awe-inspiring or encouraging for those of us who'd hoped President Obama would stiffen his spine, or at least find a semblance of one in dealing with the bad faith repukes over the debt ceiling. We now see he's preparing a "sweetening" deal to give up at least $2 trillion in spending cuts, including "major changes to Social Security and Medicare cuts" - this despite the fact we know damned well we can't "cut" our way out of this deficit mess. TAXES MUST BE RAISED in one to one proportion to any spending cuts! And that means not merely closing loopholes!

As I noted in a previous blog:

this is a god-awful, terrible idea! The reason is simple economics! The economy is fragile now and in a state of spinning its wheels because too many supply side fixes have been provided, and not nearly enough on the DEMAND side! The latter implies MORE spending, not less, and that means not removing the basis for middle and working class people to do so! When you advertise cuts, any kind of spending cuts, you are threatening the demand side with instability, because people will then pull back personal spending in proportion. Since personal consumption contributes 60% to the GDP this is a very dangerous and stupid action, but one which the disgusting vile repukes are more than happy to desire - since they know the devastated economy by next year will hurl Obama's re-election chances into the proverbial crapper.

Does he see any of this? One wonders! Especially after he literally gave away the country store and then some with his allowing the extension of ALL the Bush tax cuts to the tune of nearly $900b last December! If he'd just had the balls then to say 'NO!' - to all the extensions- we'd have been nearly $1 trillion less in the hole. If he'd even made raising the debt ceiling THEN part of the package (as Nicholas Kristof suggested to him yesterday in his Twitter conference) we wouldn't have to be talking about major changes to the social insurance programs (NOT "entitlements"!) now!

In that earlier blog I quoted from the essay, Our Greek Tragedy, appearing in TIME (July 4, p.. 26) by Rana Forhoohar:

"There's still a belief that the government can cut spending wholesale and expect consumers to pick up the slack. This is magical thinking!"

Which is exactly the core issue. Obama appears to have taken the Repukes' kool aid that the deficit problem can be saved by massive spending cuts. This is bald ignorance and monstrous codswallop! As I also noted, the problem is that aggregate demand is low (based on a tabulated rate of 9% unemployment and more like 16% real unemployment). Aggregate demand is composed of two parts: 1) demand generated by consumers for goods and services, and 2) the demand for investment goods.

In the case of (1), apart from the affluent who can afford to buy Marilyn Monroe dresses for $6 million and 100k blood diamonds for $20m, consumer demand remains low, falling almost quarterly! This is because the wages that support it are too low! The average worker's wages have remained static or gone down since the recession theoretically ended. Thus, consumers are buying less, and resorting to more saving.

16 million remain unemployed and more than 38 million are underemployed - so obviously they can't spend more, and as time goes on will plausibly spend less. Then there are the millions of seniors hurt by the lack of COLAs (cost of living allowances from Social Security, the past two years) so effectively they are already suffering from major cuts - since part of their Social Security payments are taken to pay for Medicare premiums! And Obama wants to cut more, by altering the COLA basis from inflation protected to consumer price index (CPI)? You have to be kidding me! This cuts seniors' income by 10% or more each year, if and when COLAs resume! They can afford neither more extended lack of COLAs, OR specious ones or higher Medicare premiums! If that happens they will pull back spending entirely adding to rapidly dropping existing demand on the side of (1). C'mon, Obama, wake up!

In other words, the demand side of the landscape looks so poorly for consumers they are hunkering down...likely expecting another shoe to drop. That "shoe" - when they pay attention to the news, sounds like a severe cut in possible social services, thanks to the Republicans' rhetoric. We expected Obama to stand up to these shit wipes and not give in to them again, as he did last December on the Bush tax cuts!

Meanwhile, investor demand for investment goods is largely hinging on their optimism or not. But when they see consumer confidence always stagnant or dropping, because of LOW demand, they have no incentive to start new businesses or invest in any! If investors are pessimistic (as many are now...because of the volatility of stocks) then they will withhold their investments- meaning the total aggregate demand drops!

Here's a numerical example of how this all works. Assume we have "full employment" (e.g. 4%) and it generates a total of $1,000 worth goods and services in a day. This is also the sum total of the profits and incomes the employees and employers share. Let households comprised of workers and employers use a large fraction (e.g. 90% or $900) of their income to purchase goods and services for consumption. The remaining 10% or $100 is saved but eventually purchased by investors as investment goods.

Now, say an agent or effect appears (e.g. states cutting pensions and benefits) which causes consumers to pull back on their spending such that the $1,000 becomes $900. Then, with an income of only $900, the consumption is also reduced, say to only $800. $200 in "savings" accrues but inveestors are so pessimistic and traumatized by the consumption decline that they only purchase $50 of the $200. In this case, the aggregate demand has shrunk 15% from $1000 ($900 consumption + $100 investment) to $850 ($800 consumption + $50 investment). The reduced investment- by a factor 2 ($100 to $50)- means that employment will drop, plausibly by the same factor. Therefore unemployment will reach: 4% x 2 = 8% for a 15% drop in aggregate demand. Similarly, if the consumptive demand is reduced to $500, and purchases are only at $450 - representing a 50% drop from what they were at 4% unemployment, with investment (out of $500 available) still at $50, then we can see that the jobs loss will increase by a factor 10 ($500/$50) rendering unemployment at: 10 x 4% = 40%. (I am assuming government spending cuts also cause nearly half the loss in consumer demand)

In this way, the stage is setting up for a major financial disaster, and a new recession or even depression. Granted, Obama wants to avoid a default on the government debt, but is it worth tossing the whole U.S. economy into the crapper to do it? (As a result of the R's extortion.) How about standing up to these assholes like Clinton did in 1995?

If as I showed, Obama really does implement a $2 trillion cut in spending, this a projected net loss of aggregate demand in the neighborhood of 40-50% by next summer! This translates into an unemployment level of more than 18% this time next year (30% real unemployment) and a new recession bordering on depression. Think the repukes will be happy? Hell, they'll be having wet dreams at the prospect of such an abomination (which they deliberately created) within months of the general election!

Are the Dems so stupid, so bereft of their own arguments and narratives that they're compelled to go along with this insanity? Are they remotely aware of the electoral and other consequences?

It doesn't seem so, nor would I have ever believed (before this) that the Dems would have allowed themselves to be so held to extortion by the Repigs that they'd sell FDR's and LBJ's major social programs down the river to appease bond pirates and political terrorists.

The bottom line here? Asking progressive citizens to agree to cuts in social safety nets in exchange for Repukes agreeing not to extend Bush tax cuts next year is a FOOL'S Errand! It's a cocklemamey "heads, I win- tails you lose" gambit that no sane or rational person would agree to. My point? If you're going to fucking demand $2 trillion in actual cuts, we need to see $2 TRILLION INCREASES in TAXES in addition to the purely PASSIVE act of not extending the Bush tax cuts (which ought to have sunseted THIS year!) Wake the fuck up, Demo-dweebs or you LOSE next year!

I am still hoping most of Obama's rhetoric is just that, and not intended to be taken seriously. If it is, and he makes the cuts to social programs being threatened or intimated, I am afraid his re-election chances will be about what Jimmy Carter's were in November of 1980.

Footnote: As of this latest edit (7:07 EDT), at least House Leader Nancy Pelosi has demonstrated some cojones, and asserted that her House caucus will have NO part in parlaying more Bush tax cuts on the backs of the elderly. She told Obama at the meeting today that Social Security will NOT be used as a "piggy bank" to finance tax cuts for the wealthiest.

Good for you, Nancy! Now let's hope that bold voice of the People, Harry Reid, also gets it - so Obama's plans lie dead in the water...where they belong with the Repuke-licans.

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