Deficit Myths: The six most prevalent lies about budget deficits and economic recovery

The tremendous power of private corporations is one of the central characteristics of US society. It’s no coincidence that those corporations, the best-organized and wealthiest interest groups in our society, have long funded economists, think tanks, and politicians who promote the economic doctrines that will serve their interests. The well-funded demagogues who have dominated current debates over budget deficits and the national debt are the latest manifestation of this influence, and have helped usher in what Nobel Prize-winning economist Paul Krugman calls a “Dark Age of macroeconomics” where many of the most basic facts of economics have been drowned out by ridiculous but useful myths. The country’s news media have lent credibility to these myths. For instance, at the most liberal end of the media spectrum, New York Times coverage implies that tax cuts for the rich are just as likely, or maybe more likely, to create jobs as the alternative route of increasing social spending—a claim recognized as false by most independent economists [1].

What follows is intended as a brief primer for countering the most dominant myths about budget deficits and economic policy currently circulating within the corporate media and halls of government. Most working people around the world have an intuitive grasp of how neoliberal globalization and fiscal austerity have hurt them. For instance, most people in the United States—Democrats and Republicans alike—are strongly opposed to any cuts to Medicare or Social Security, and no amount of corporate-funded propaganda is likely to change their minds in the near future. But a clear understanding of the economic fallacies of the deficit debate is prerequisite for countering those who won’t be content until the United States is converted into a Dickensian dystopia [2].


Current budget deficits are the result of too much government spending on education, health care, welfare, Social Security, and benefits for public-sector unions

One can barely turn on the TV these days without hearing politicians and commentators shouting about “out-of-control spending.” The main target of their venom is government spending on social programs like Medicaid, public schools, public housing, welfare, and unemployment benefits, plus “entitlements” like Social Security and Medicare. The implication is that these types of spending consume the vast majority of the government budget (and also that they mainly benefit lazy and undeserving minorities—e.g., the iconic racist image, popularized during the Reagan era, of the pregnant black woman who cruises into the welfare office in a Cadillac) [3].


The Federal Budget Deficit


Single-minded preoccupation with “cutting the deficit” is dangerous, since the US government should increase its deficit spending in the short term to help stimulate job creation (see below, Myth 3). But if the deficit itself is the topic of debate, its actual sources are not difficult to understand. Three stand out as contributors to the long-term “structural deficit,” meaning the portion of the deficit resulting from factors other than the economic recession that struck in 2008 due to Wall Street’s recklessness:

  1. Wars and military spending
  2. Tax cuts for the wealthy
  3. Skyrocketing health care costs

The horrific human consequences aside, spending on the Iraq War alone had contributed to a massive increase in the national debt prior to the financial crisis, and conservative estimates of the financial costs of the war surpass $3 trillion. When the Afghanistan and Pakistan wars are included, the total may be more than $4 trillion [4]. But war spending is only a small portion of total military expenditures. This year, as in all recent years, the US government will spend about half its total budget, including about two-thirds of all discretionary spending, on “security”—meaning the military, multiple overseas wars, nuclear weapons, costs incurred by past military expenditures, and so forth. In 2010 the US government spent $28 billion on its main welfare program, Temporary Assistance to Needy Families, plus other related childcare programs, compared to about $1.4 trillion on the military. Expenditures on all ”income security” programs combined—including unemployment benefits, lower-income tax credits, food stamps, child nutrition, foster care, etc.—totaled less than one-third of the military budget [5]. The United States spends nearly as much on its military as the rest of the world combined, and its legitimate defense needs could be covered with a tiny fraction of the current military budget.

The 2012 “defense” budget now being debated in Congress will almost certainly be a new record-high. Recent rhetoric about cutting Pentagon spending is highly disingenuous: the so-called “cuts” that Obama and former Defense Secretary Gates proposed this past spring are in fact reductions in the planned rate of growth in Pentagon spending over time. Gates, meanwhile, has boasted of wanting to reduce military spending, but largely by slashing veterans’ health benefits—one of the few components of that spending that actually serve a positive and necessary purpose (necessary because of past US imperialism, but necessary nonetheless) [6].

A second root cause of the federal deficit has been the dramatic reduction in tax rates for corporations and the wealthiest citizens. The income tax rate on households making over $250,000 has declined dramatically over the past sixty years, from a high of 94 percent in 1944 to 35 percent today (however, actual tax rates on the rich have always been significantly lower than these figures due to tax loopholes and exemptions). The Bush administration cut taxes in 2001 and again in 2003, quickly helping to erase the budget surplus inherited from the Clinton era. The recent extension of Bush-era tax cuts is projected to cost the federal government $3.7 trillion over the next decade (President Obama’s initial proposal, from which he meekly shied away in response to Republican pressure, would have extended virtually all of the tax cuts, except for extra tax breaks for households making over $250,000, and would have expanded the deficit by about $3 trillion instead of $3.7 trillion). The extension of the tax cuts for these richest households will cost $680 billion over ten years, and the money will go primarily to the richest 0.1 percent of taxpayers—that is, the richest one-tenth of the richest one percent of the US population, who average $8.4 million in yearly income [7]. The Center on Budget and Policy Priorities estimates that all of these tax cuts along with the Iraq and Afghanistan wars will together swell the federal deficit by nearly $7 trillion during the period 2009 to 2019 [8]. And current negotiations may reduce the top income tax rate further, from 35 to 29 percent. Only in a thoroughly-Orwellian political and media climate can those who favor lavish military spending and tax cuts for the rich be considered “deficit hawks” or “fiscal conservatives.”

Blaming Social Security and Medicare for the federal deficit, as both Obama and the Republicans are currently doing, is disingenuous for three reasons: 1) these programs are trust funds funded by payroll taxes, and are therefore separate from other types of government spending; 2) Social Security is in sound fiscal condition, and will be through at least 2036; and 3) while the rising costs of Medicare are a concern in the long term, the main problem lies in rising health care costs in the private sector that provides the care that Medicare funds—the third major reason for the current federal deficit—and has little to do with the Medicare program itself [9].

The US private health care system is the most inefficient in the industrialized world. The country spends about twice as much per capita on health care as other industrialized nations, and with more dismal health outcomes (e.g., lower life expectancy). But Medicare is not the problem—in fact, it is the cheapest, most cost-efficient insurer in the country, with administrative costs of between 2 and 4 percent compared to 11 percent in the private health insurance sector. For every dollar spent on health care in the United States, 31 cents go toward administrative costs—about twice the figure (16.7) under Canada’s single-payer health insurance system. The only genuine solution to rising health care costs is to extend the government-run Medicare system to cover the entire population (“single payer,” or “Medicare for All”), in conjunction with other cost-containment measures such as government negotiations over prescription drug prices and stricter regulations on pharmaceutical companies and hospitals. Medicare for All would not completely solve the problem of costs because it would replace only one sector of the inefficient private health-industrial complex—the private insurers—but by eliminating the private insurance companies it would cut down on costs everywhere (for example, health care providers would no longer have to waste time and money dealing with hundreds of insurance companies). The transition to a single-payer insurance program would alone save at least $350 billion each year. As economists Dean Baker and David Rosnick point out, “If the United States could make its [health care] system as efficient as that of other wealthy countries, there would be no budget deficit problem.” Incidentally, Medicare for All would have the added benefit of giving the United States some semblance of a civilized society, where 45,000 people would no longer die each year because they can’t afford health insurance [10].

State Budget Deficits

At the level of individual states, the primary scapegoats are education spending, Medicaid, and other social programs, plus the public-sector unions. The assertion that public schoolchildren, the homeless, and public-sector workers are draining the resources of state governments has little basis in reality, however.

Careful studies by the Economic Policy Institute, the Center for Economic Policy Research, and other independent analysts have found that public-sector wages are actually lower than private-sector wages when analyses control for age and educational levels (public workers tend to be older and better-educated) [11]. The average teacher’s starting salary in this country is $39,000 [12].

What about all those “gold-plated pensions”? A few public retirees do make six-figure pensions, but they are not typical, as corporate press outlets imply them to be [13]. The median pension in Wisconsin is less than $23,000. In New Jersey, another state with a cowboy governor committed to redistributing wealth from working families to the rich, the average pension for state employees is $39,500 a year. Moreover, about one-third of the country’s state and local public-sector employees will be ineligible for Social Security when they retire, meaning that their pensions will be crucial to their subsistence [14]. (Even if public-sector wages and benefits were higher than private-sector ones, it wouldn’t mean public-sector workers are overpaid. Public-sector workers are among the few segments of the workforce that are unionized in large numbers and still have relatively decent benefit packages. The proper approach is to raise the wages and benefits of poorer workers—“upward leveling” rather than downward leveling. Driving some workers’ wages downward ultimately hurts all workers by accelerating a vicious race to the bottom.) [15]

Spending on health care and education is not the source of state budget woes. The main immediate cause of state budget deficits was the sharp decline of tax revenues that followed the start of the current Wall Street-generated recession. The employee pension funds that state and local governments had invested in the stock market were hit particularly hard, with their value dropping by close to $900 billion in two years [16]. Wall Street’s recklessness and the wave of government financial deregulation that started in the 1980s, culminating in the burst of the stock market and housing bubbles, are the primary culprits.

Tax cuts for corporations and the rich have also contributed to state deficits. Wisconsin Governor Scott Walker cut corporate taxes by $140 million, contributing to the budget deficit that he then used to justify his assault on Wisconsin’s workers [17]. The example of New York, which happens to have a Democratic governor, demonstrates the bipartisan nature of the assault. Governor Cuomo and the state legislature could have wiped out the state’s $10 billion budget deficit by extending a tax increase on households making over $300,000 (which would’ve raised $6 billion over two years), reinstituting a tax on stock transactions (which would’ve erased the deficit in one year), and rescinding some of the state’s $5.4 billion in annual tax subsidies to private businesses [18]. They did none of the above, instead choosing to target workers’ contracts, to raise tuition at public universities, and to slash state funding for public schools and universities, Medicaid, and the Metropolitan Transportation Authority. Cuomo even publicly called upon big business to hire more lobbyists to counter the labor unions, schoolchildren, and other “special interests” opposed to his budget. Fresh off what he calls an “unusually successful” political year, Cuomo has just declared that “curbing public pension benefits will be his top goal” next year [19].

In short, most current talk about the causes of federal and state deficits is deeply misleading. The assault on workers, students, and the general population is a political choice, not an imperative mandated by budgetary crises. The rhetoric is misleading, but not accidental. The perpetuation of myths about social spending, entitlement programs, and public-sector workers reflects a well-tested strategy, what Robin Hahnel and Edward Herman call the “balanced-budget ploy”: military spending and tax cuts for the rich generate huge budget deficits and inflation, which in turn becomes irrefutable evidence of the need to reduce the “out-of-control spending” on social programs like education, health care, and welfare—spending which is miniscule by comparison [20]. A few years prior to the current crisis, David Harvey presciently predicted that

a global financial crisis in part provoked by its own reckless economic policies would permit the US government to finally rid itself of any obligation whatsoever to provide for the welfare of its citizens except for the ratcheting up of that military and police power that might be needed to quell social unrest and compel global discipline…In the wake of a financial crash, the ruling elite may hope to emerge even more empowered than before. [21]

Unsurprisingly, the bipartisan adherents of this logic are once again using perceived fiscal crises to try to justify the imposition of highly regressive policies that will hurt hundreds of millions of people while further enriching the super-rich. These policies have been remarkably successful. Two renowned political economists observe that from 2002 to 2007, “The richest 1 percent [in the United States] received fully 65 percent of all household income growth.” Taking a more long-term view, former Reagan administration budget director David Stockman notes that the total net worth of the richest five percent of US households has exploded from $8 trillion in 1985 to $40 trillion today; those households “have gained more wealth than the whole human race had created prior to 1980” [22].

This pattern persists to the extent that the beneficiaries of military spending and other regressive, wealth-concentrating policies remain more organized and more aggressive than the beneficiaries of social spending. While corporate lobbies are well-organized and extremely well-funded, at the present time the poor, sick, unemployed, and working population remains fragmented and largely depoliticized.


The 2009 Obama stimulus bill has further hurt the economy and produced greater unemployment

There is little doubt that the US unemployment rate would have been higher had it not been for the $787 billion stimulus bill that President Obama signed in February 2009. According to the August 2010 estimates of the Congressional Budget Office, the stimulus “[i]ncreased the number of people employed by between 1.4 million and 3.3 million” [23]. When the “housing bubble” of artificially-high home prices burst in 2008, it reduced not only housing prices but stock values and private spending on construction. Total annual consumption, or demand, in the US economy plummeted by between $1.05 trillion and $1.23 trillion. When private demand (i.e., demand from businesses and consumers) falls and shows no signs of recovering, government—the third source of demand in society—must pick up the slack as the “buyer of last resort” [24]. This logic lay behind the 2009 stimulus bill.

But even if $787 billion sounds like a huge sum of money, it was much too small to dig the US economy out of its recession. Because of budget cuts at the state and local levels, the stimulus’s net contribution to total demand was much less than $787 billion. According to economists at the Center for Economic Policy Research, it ultimately only “amounted to about one-eighth of the private demand that our economy lost from the bursting of the real estate bubble” [25]. As Nobel laureate economist Joseph Stiglitz says, “The problem with the stimulus was not that it didn’t work, but it wasn’t big enough…What was needed was a stimulus of at least 50 percent larger.” Stiglitz adds that the stimulus was also poorly designed, with much of it coming in the form of tax cuts that didn’t immediately translate into increased demand/consumption when it should have prioritized direct cash transfers to states to help maintain schools, universities, and social programs. About $225 billion of the stimulus went to tax cuts for business and investors rather than ordinary people [26].

The 2009 Obama stimulus was woefully inadequate and poorly-designed, but without it the unemployment rate would be even worse.


Deficit spending is terrible for the economy; balancing the budget should be our first priority

Current politicians are basically following the economic policies of Herbert Hoover, refusing to unleash the large government stimulus that is essential to put people back to work, and simultaneously funneling ever-greater wealth to those who already have it at the expense of the vast majority of the population. A bipartisan obsession with cutting the deficit has consumed Congress, the Obama administration, and most mainstream commentary (as well as the other G-20 governments). Cutting the deficit and the national debt at the present time is stupid and will only exacerbate unemployment. Economist Robin Hahnel notes that John Maynard Keynes, the father of modern macroeconomics whose idea of deficit spending help the United States climb out of the Great Depression,

is surely rolling over in his grave at what amounts to global economic suicide, and a return to misguided, nineteenth century economics…Nineteenth century economic theory taught that when recessions hit, income drops, and government tax revenues fall, governments should reduce spending to restore balance in their budgets. This was the advice of Treasury Secretary Andrew Mellon which Herbert Hoover acted on in 1929. [27]

Much bolder stimulus spending was needed in 2009, and continues to be necessary today if politicians are serious about reducing the unemployment rate (which stands at somewhere between 16 and 20 percent, and much higher in certain regions and among urban blacks). From a macroeconomic standpoint, the main feature of the current recession has been the dramatic decline in demand, which in turn leads businesses to lay off workers and produce less, which in turn causes greater poverty and unemployment, in a vicious downward cycle. As noted in the section above, there are three sources of demand in the economy: consumers, businesses, and the government. Since the first two groups have been unable (and, in the case of big business, unwilling) to re-activate the economy through new investments and spending, the government must pick up the slack via bold stimulus spending in areas like education, health care, mass transit, green technology, and public housing. Doing so would create millions of new jobs, reduce inequality, and thereby increase consumer spending/demand and, in turn, lead to greater employment. “Monetary” options such as lowering interest rates to stimulate business investment have largely failed, with interest rates already very low. US corporations are awash in money and capital (with over $2 trillion in reserves), but aren’t spending it. The only solution is large stimulus spending by the federal government, including federal assistance to state governments, which are legally required to balance their budgets. Even the International Monetary Fund, the standard-bearer of neoliberal austerity since the early 1980s, now admits that fiscal austerity (i.e., cutting spending) will not produce short-term economic growth [28].

The growth of the US national debt hardly merits the single-minded hysteria that it has inspired of late. As economist Dean Baker observes, the current debt of $14.3 trillion is around 90 percent of the US Gross Domestic Product, which is not inordinately large by historical standards:

Is that big? Well the debt-to-GDP ratio was over 110 percent after World War II. The United Kingdom had debt-to-GDP ratios of more than 100 percent for much of the 19th century as it was establishing itself as the world’s pre-eminent industrial power. Japan has a debt-to-GDP ratio of more than 220 percent of GDP and can still borrow in financial markets long-term at interest rates of less than 1.5 percent.  So, what’s the problem? The politicians who want to cut Social Security and Medicare obviously want the public to believe that there is a huge problem and due to the incompetence of the media, they have managed to instill fear throughout the nation about this massive non-problem. [29]

Long-term interest rates are extraordinarily low by historical standards, meaning that increased government borrowing at the present time will not cause the debt to skyrocket as most pundits suggest, and will not mean “mortgaging our children’s future” [30]. The US national debt, like the federal deficit, should be a non-issue at the present time. In fact, it’s worse than a non-issue, because focusing on the debt and/or deficit right now actively impedes economic recovery. And the type of spending that politicians are targeting makes these efforts even more disastrous, at least for the vast majority of the population that depends on things like public schools, Social Security, Medicare, and insecure jobs. Anthony Dimaggio is right in commenting that “[d]ebt and deficit reduction are merely a class war tactic to be used against the poor and middle class” [31]. Behind the technical-sounding discussion of deficits and “fiscal discipline” lie the thinly-veiled class interests of an economic elite hoping to further weaken organized labor, eviscerate the country’s already pathetic social safety net, and increase, beyond its already absurd proportions, the share of economic wealth that accrues to the top one percent of the US public.

Nobel laureate economist Joseph Stiglitz puts it simply: those who oppose additional stimulus spending right now “don’t understand basic economics” [32]. Unfortunately, press reportage has sunk so low that even in the nation’s leading liberal newspaper, “basic economics” are presented as unproven conjecture rather than the central findings of 80 years of macroeconomics research [33].

An escalating unemployment rate and increased material hardship for the majority may be just some of the negative consequences of budget austerity. The lack of bold stimulus spending is also a prime reason for the waning popularity of Obama and the Democrats over the past two years. It was the key reason for the Republican resurgence in the mid-term elections last year, and will probably play a key role in the November 2012 elections [34]. Workers all around the country are desperate, and the Democrats—the alleged reformists, the “party of the people”—are not doing anything to help them. Popular desperation and disillusion with existing political options is now driving increasing numbers of ordinary people into the arms of radical right-wing, proto-fascist forces (or at least apathy and despair, which can breed other destructive behaviors), a trend that may seem familiar to now-elderly Germans and Italians.


Cutting taxes for the rich will help the economy


The government has several options for stimulating demand and thus combating unemployment: it can cut taxes, increase spending (or some combination of both), or the Federal Reserve can lower interest rates to stimulate borrowing. Since interest rates have already been lowered to almost zero, the last option is not promising. So what about the other two options, cutting taxes versus increasing spending? Or, to be more precise, cutting taxes for the rich versus increasing spending?

Both actions can have positive effects on demand and therefore reduce the unemployment rate. But their effects on demand are not the same. Dollar-for-dollar increases in government spending increase aggregate demand by more than a cut in taxes because part of any tax cut is saved rather than spent. This rule is particularly true in the case of tax cuts for the wealthy, who save a higher percentage of their income than do poor, working-class, and middle-class families. The claim that giving tax breaks to the rich “creates jobs” is true in a limited sense—tax cuts for the rich may lead to the creation of some jobs. The key question is whether they will create more jobs than alternative measures like increasing unemployment benefits, increasing funding for public schools, or cutting taxes for the working and middle classes by an equivalent amount. The answer to this question, established and confirmed by dozens of economic studies over the years, is no. Given a choice between lowering taxes on the wealthiest taxpayers and increasing social spending, the latter option is the more helpful (its positive effect on demand is greater, in addition to the fact that it helps needy people rather than further enriching the rich) [35]. Increasing the federal deficit through increased borrowing is absolutely essential right now, but even without more borrowing the government could provide some economic stimulus by increasing taxes on the wealthy to pay for increases in spending on social programs. Economic analyst Jack Rasmus calculates that merely forcing the wealthiest one percent of households (who receive 24 percent of all income) to pay the same payroll taxes paid by ordinary families would immediately raise $170 billion, with which the federal government could create a total of six million new jobs in the public and private sectors [36].

There are several reasons why subsidizing the rich generates less economic growth and greater inequality than equivalent subsidization of the rest of society. Most importantly, as noted above, the wealthy tend to save more money than the rest of the population, meaning that the enormous sums that wind up as corporate and individual profits (or that are saved courtesy of tax breaks) are not reinvested in the economy to the same extent that they would be if they were in the hands of working-class families, who spend most of their income and thereby stimulate further job creation. This rule is especially relevant when consumer demand is not great enough to induce businesses to invest their money in new production; as Rasmus writes, in this type of situation “business will just pocket the tax cut savings; or invest it offshore where there is demand, as in China or Brazil; or use it to speculate in foreign exchange or other such markets to turn a nice short-term capital gain.” One indication came in a recent Obama speech to the Chamber of Commerce, where the President rather pathetically begged corporations “to ‘get in the game’ by letting loose trillions of dollars being held in reserve” [37]. Subsidies to corporations also often end up being spent overseas (including by companies that happily accept public subsidies, then use them to defray the costs of relocating to Indonesia or Vietnam). Many of the jobs that are created by subsidizing the rich also carry six-figure salaries, whereas public investment in education, construction, and other sectors tends to create more jobs which pay lower, but still decent, salaries [38].

What political economists call wage-led growth—raising worker wages and otherwise redistributing wealth to stimulate the economy—is not only more just, but also simply a much more effective means of generating growth than the sort of trickle-down policies that have reigned supreme for the last 35 years [39]. The regressive, trickle-down fiscal policies and corporate wealth-fare which the Obama administration has embraced will continue to fail to produce genuine reductions in the unemployment rate. The $680 billion that the extension of the Bush tax cuts for the rich will cost the federal government in the coming decade would create many more jobs if spent on social programs and other subsidies to the working population. (The same holds true for military spending, which is a relatively inefficient means of job creation compared with government investment in infrastructure, education, mass transit, and health care [40].)


The US economy originally developed as the result of free trade, minimal government spending, and minimal government regulation of business


Perhaps the biggest myth about the history of the US economy is that it developed thanks to “free trade”—minimal government intervention, low spending, unregulated markets, and the other standard rules of free-market logic. In reality, US industry and agribusiness have always demanded government protection from the discipline of the market, in the form of tariffs, subsidies, tax breaks, preferential foreign trade agreements, government contracts, and diverse other mechanisms [41].

Most US industries—textiles, railroads, automobiles, chemicals, airplanes, computers, to name a few—were utterly dependent upon government intervention for their initial take-off. The US government, like the English before it, simply ignored things like intellectual property rights when they proved inconvenient. For most of the nineteenth century, “the tariff” was a hallmark of domestic policy, reflecting the fierce protectionist stance of the government in that key stage of US industrialization. Liberalized trade is permissible only when powerful US business sectors stand to benefit by virtue of the advantages they’ve acquired as the result of prior protection. Like in England, US producers came to favor free trade only after they had risen above foreign competitors (in the US case, in the early twentieth century), making competition safe for them. Reducing tariffs at that point was acceptable since major US industries no longer needed it. Likewise, US agro-exporters supported NAFTA’s dismantling of tariffs so they could flood the Mexican market with cheap grains. Yet the commitment to free trade is usually fleeting, for when faced with any perceived threat its elite advocates immediately demand a return to protectionism. When the Great Depression hit, and when the 2008 financial crisis struck, US corporations and banks were quick to demand—and receive—generous government assistance in the form of tariffs, bail-outs, and the like. Big agro-business continues to demand billions of dollars in direct public subsidies every year at the same time that it sings the virtues of liberalized trade with Mexico.

The Pentagon is the United States’ historically unequaled system for providing public taxpayer subsidies to private corporations like Boeing and Raytheon, which then reap the profits—what’s sometimes called corporate “wealth-fare” [42]. Most of this spending is waste. Military spending has long been the sacred cow of federal spending, remaining untouchable whenever there is any talk of reducing the deficit. The main reason is that military contracts are a boondoggle for thousands of corporations, which use their lobbying influence in Washington to guarantee the steady growth of the Pentagon budget. US foreign military aid and arms sales, like the Obama administration’s recent $60 billion deal with the repressive Saudi Arabian regime, are added subsidies for US corporations. Lucrative overseas trade deals, like Obama’s recent $45 billion trade package with China, are thinly-veiled subsidies to the same corporations and the big investment banks [43].

The economic policy prescriptions that the US Treasury and international financial institutions have imposed on underdeveloped countries in recent decades (minimal government spending, deregulation, liberalized trade, an emphasis on debt repayment, respect for intellectual property rights, etc.) are in many ways antithetical to the interventionist policies long followed by the rich nations. “Kicking away the ladder,” as economist Ha-Joon Chang calls it, is a fitting characterization of what developed countries have long been doing from their position at the top of the global economy.

The only Third World countries that have had relative success in developing their economies in the past sixty years are those that have, like the United States, employed protectionist and interventionist measures of varying sorts to shelter and support their domestic industries. Ha-Joon Chang observes that “virtually all the successful developing countries since the Second World War initially succeeded through nationalistic policies, using protection, subsidies and other forms of government intervention”—a historical reality that is “almost the polar opposite of the official history” [44]. Historical and economic research usually has little effect on the “official history,” however, which is instead fabricated and tailored to the needs of the wealthy and powerful. The corporate press, both liberal and conservative, is central to enforcing such myths. For example, in a recent series of articles and editorials on US-China relations, the New York Times assailed the Chinese government for erecting trade barriers and ignoring intellectual property rights—two of the mechanisms utilized extensively by US industry and government throughout the nineteenth century, though the latter facts were of course omitted [45].

Mainstream commentary on government spending follows a similar logic: when US government intervention benefits ordinary people or when the governments of poor nations intervene to assist their own vulnerable people, intervention is venomously denounced as “hand-outs” which rob the hard-working taxpayer and upset the normal functioning of the economy. When the rich and powerful are the recipients, the hand-outs are either ignored entirely by respectable commentators or praised as examples of wise government investment in job creation and economic development (and the latter form of hand-outs, it must be emphasized, far outweighs social welfare spending geared toward workers and the poor, even though the beneficiaries are far fewer).



The US public hates “big government” and deficit spending, and loves militarized corporate capitalism

A sixth major myth holds that the US public reviles “big government,” and particularly government spending (and as mentioned, they are also “outraged” at greedy public-sector unions and their workers) [46]. The deficit demagogues, we’re told, are just reflecting the popular mood.

Despite the recent hysteria over the deficit, the public’s priorities are quite clear. This past October, after analyzing a wide range of opinion polls, Christopher Howard and Rick Valelly found “that the public is concerned primarily with economic recovery and jobs. Curbing the deficit actually ranks low among its concerns.” The pattern holds true through the latest CBS/New York Times poll conducted in late June, where respondents overwhelmingly favored Congress focusing on job creation rather than reducing the deficit (53 percent said that the economy and job creation were “the most important problem” facing the United States, while just 7 percent said it was the federal deficit or national debt) [47]. This sentiment holds even among most of those who identify with the Tea Party. For example, Howard and Valelly point out that a CBS/Times poll last year “found that even among Tea Party supporters, focusing on the economy/jobs (44 percent) was far more important than focusing on the deficit or debt (10 percent)” [48].

Another recent poll by the respected WorldPublicOpinion.org suggests that those who sympathize with the Tea Party—roughly half the US population—do so not because they fear “big government,” but because they feel that government is “not following the will of the people” (an astronomical 81 percent of the US public thinks their government “is pretty much run by a few big interests”) [49].Past polls have demonstrated that most people fear “big government” only when that government works against their interests. For instance, people support strong regulations on big business when necessary to avert environmental destruction or to safeguard workers’ rights, and think that the government should ensure universal access to basic needs like health care, food, and education. They even look quite favorably upon labor unions, despite most reporters’ continued argument to the contrary, which is remarkable given the sustained corporate propaganda offensive against unions over many decades [50].

In contrast, people think that corporations and the rich should have much less influence over government. They oppose “big government” that favors the top-income sectors at the expense of everyone else. Two of the most important mechanisms by which the US government subsidizes the rich—massive Pentagon spending and low tax rates—have drawn public outrage despite receiving very little condemnation (and often praise) from the corporate-funded press and punditry [51]. A poll from this past April triggered particular concern among business-friendly observers, since it found “a sharp drop in trust in the free enterprise system” among the US public [52].

Evidence of public resistance occasionally appears, however, even in the corporate press. When a recent poll by 60 Minutes and Vanity Fair gave respondents a list of options for reducing the deficit, the overwhelming majority said they would first “increase taxes on the wealthy” (61 percent) or “cut defense spending” (20 percent) as a first step; just 4 percent would cut Medicare, and 3 percent would cut Social Security [53]. People, regardless of party affiliation, are fiercely opposed to cutting Medicare and Social Security, as confirmed by polls and by this past May’s upset in rural New York State of a Republican candidate for Congress who supported cuts to Medicare, in a special election that the AP characterized as “a referendum on Medicare” [54].

Numerous other polls have confirmed these basic sentiments, but seldom appear in mainstream discussion: a detailed poll by the Program for Public Consultation and Knowledge Networks released this past February found that respondents would cut annual spending on wars and “defense” by an average of $122 billion. By contrast, the top programs for which respondents would increase spending were job training, higher education, conservation and renewable energy, and primary and secondary school funding [55]. Undoubtedly aware of the public’s budgetary priorities, politicians have recently sought to create the impression that they plan to reduce military spending, and the corporate press has kindly obliged [56]. (See also Myth 1, above.) But from recent public opinion polls, it’s clear that the most pressing “deficit” facing the United States is the democratic deficit: the enormous gap between public wishes and government policy.

Of course, public views aren’t taken too seriously by respectable elite opinion and seldom have much effect on policy. In the current debate over the federal budget deficit, “The fact that the public would seem to prefer an entirely different type of budget deal” than the ones proposed by Obama and the Republicans “is a non-factor,” as media critic Peter Hart notes [57]. A longstanding bipartisan consensus holds that the public’s input should be limited to choosing between the two political wings of the US business class once every four years. The Bush-Cheney administration explicitly espoused this definition of democracy, openly declaring that “You had your input. The American people have input every four years, and that’s the way our system is set up.” But the administration was only unique in saying explicitly what every other administration has declared through its practice; most politicians have more regard for public relations [58].

Keynesianism: A Necessary Step on the Path to Revolution


Lately I’ve had several conversations with leftists where I’ve presented the arguments outlined above, and they’ve replied to the effect that “But isn’t that just Keynesianism? Doesn’t that make us reformists, not revolutionaries?” The spectrum of mainstream debate has shifted so far to the right that the common-sense Keynesian fiscal policies that were considered mainstream forty years ago are now considered to be far-left. So what can the (real) left do? Robin Hahnel provides a good answer:

While socialists should not have to lead the charge for Keynesian policies to ameliorate capitalist crises, unfortunately that is the position we find ourselves in. Right now we must not only do our own work—explaining why all versions of capitalism are far less desirable than participatory, democratic socialism—but do the work of Keynesian reformers as well who have lost influence in all major political parties…[U]nless I am pleasantly surprised…there is no road to participatory, democratic socialism that does not run through many successful reform campaigns to bring Keynesian policies back in vogue. [59]

Promoting bold deficit spending directed at helping ordinary people is a necessary task, even if not a “revolutionary” one, for the left. From there we can move on to overthrowing the entire capitalist system. Of course, the struggles can and should be simultaneous: as we promote short-term alternatives (Keynesianism), we must also work to articulate, discuss, demand, and construct the long-term alternative of a democratic, participatory socialism [60]. Struggling for reforms need not make us reformists [61].




*Thanks to Robin Hahnel for helpful feedback.


[1] Krugman, “A Dark Age of Macroeconomics (Wonkish),” New York Times blog, January 27, 2009. See the insightful critiques of press coverage appearing regularly on the website of Fairness & Accuracy in Reporting (FAIR). Binyamin Appelbaum, “Politicians Can’t Agree on Debt? Well, Neither Can Economists,” NYT, July 18, 2011, A11. The framing of the issue as a debate between two equally valid sides parallels coverage of the “debate” over climate change, in which the press implies that there are genuine disagreements among an evenly-divided scientific community as to whether or not climate change is caused by human activities; see the interview with Noam Chomsky, “How Climate Change Became a ‘Liberal Hoax,’” ZNet, July 15, 2011. Dean Baker makes the comparison in a recent discussion of public-sector pensions: “With the recent spate of attacks on climate science and evolution it should not be a surprise that traditional defined benefit pensions in the public sector are now also under attack. There are powerful political actors in this country who are anxious to build a bridge back to the 19th century; taking us to a time where working people enjoyed few protections and could not count on sharing in the gains of economic growth” (“Public Pensions 101,” Truthout, March 7, 2011).

[2] Only with the most shameless of cynicism can the rich and their political representatives accuse opponents of “class warfare,” as Republican politicians sometimes accuse Democrats of doing. They themselves have always been engaged in just that, and their war has become much more closely coordinated, better funded, and more determined since the early 1970s; see David Harvey, A Brief History of Neoliberalism (Oxford: Oxford University Press, 2005). The attack has become so vicious and so unabashed that a number of prominent economists never known for their left-wing radicalism or polemical tone have issued vitriolic critiques; former World Bank chief economist Joseph Stiglitz and Paul Krugman, both Nobel Prize winners, are perhaps the best known. Krugman wrote last year of “a dysfunctional and corrupt political culture, in which Congress won’t take action to revive the economy, pleads poverty when it comes to protecting the jobs of schoolteachers and firefighters, but declares cost no object when it comes to sparing the already wealthy even the slightest financial inconvenience” (“Now That’s Rich,” New York Times, August 23, 2010, A23).

[3] President Obama and most Democrats agree. In his 2011 State of the Union address, Obama promised a five-year freeze on most domestic social spending, which he had already started to implement by mandating pay freezes for federal employees. And lately the Obama White House has signaled its willingness to cut Medicare and Social Security—part of what Obama calls a “balanced approach” to the deficit and debt. Current fiscal crises are viewed as an opportunity by Republicans and Democrats who would like to concentrate the country’s wealth even further within the top one percent of the population, and, as a top Democratic official told the press when asked about potential cuts to Social Security, “it would be a real mistake it we let it pass us by” (Lori Montgomery, “In Debt Talks, Obama Offers Social Security Cuts,” Washington Post, July 6, 2011). At the state level, many Democratic governors have joined Republicans in the assault on social spending and public-sector workers. In New York, for instance, Gov. Andrew Cuomo has further gutted spending on public education, mass transit, and other social services while cutting taxes for the wealthiest five percent of New Yorkers; see my “Shock Doctrine: New York,” ZNet, April 1, 2011. On the current deficit reduction negotiations involving Obama and Congressional leaders, see economist Michael Hudson interviewed in “Pushing Crisis: GOP Cries Wolf on Debt Ceiling in Order to Impose Radical Pro-Rich Agenda,”Democracy Now! July 22, 2011.

[4] Joseph E. Stiglitz and Linda J. Bilmes, “The True Cost of the Iraq War: $3 Trillion and Beyond,” Washington Post, September 5, 2010. See also the various interviews of Stiglitz and more recently of Brown University political scientist Neta Crawford on Democracy Now! (“As Debt Talks Threaten Medicare, Social Security, Study Finds U.S. Spending $4 Trillion on War,” July 8, 2011).

[5] For military spending see the pie charts compiled annually by the War Resisters League. Figures on TANF and “income security” spending come from D. Andrew Austin and Mindy R. Levit, Mandatory Spending since 1962 (Congressional Research Service, June 15, 2011), 3. Figure of two-thirds comes from the report by Obama’s deficit commission (The Moment of Truth: Report of the National Commission on Fiscal Responsibility and Reform [December 2010], 22).

[6] Gareth Porter, “Numbers Racketeers: The Obama-Gates Scam on Military Spending,” Counterpunch, April 21, 2011; David Alexander, “U.S. House Approves $649 Bln for Defense in 2012,” Reuters, July 8, 2011; Elisabeth Bumiller and Thom Shanker, “Gates Seeking to Contain Military Health Costs,” NYT, November 29, 2010, AI.

[7] Adam Looney, “The Debate Over Expiring Tax Cuts: What About the Deficit?” (Tax Policy Center, 2010), 1-2. Cf. Paul Krugman, “Now That’s Rich,” NYT, August 23, 2010, A23.

[8] Kathy A. Ruffing and James R. Horney, “Economic Downturn and Bush Policies Continue to Drive Large Projected Deficits; Economic Recovery Measures, Financial Rescues Have Only Temporary Impact,” May 10, 2011, 3.

[9] The best resource on Social Security is the work of economist Dean Baker: e.g., “Seven Key Facts about Social Security and the Federal Budget,” CEPR Issue Brief, September 2010; “Macho Men Are Wrong on Social Security,” Financial Times, March 30, 2011;“Manufacturing Deficit Fear,” Guardian, July 11, 2011.

[10] Steffie Woolhandler, et al., “Costs of Health Administration in the U.S. and Canada,” New England Journal of Medicine 349, no. 8 (2003): 768-75; Baker and Rosnick, “7 Things You Need to Know About the National Debt, Deficits, and the Dollar” (CEPR, June 2011), 7; Andrew P. Wilper, et al., “Health Insurance and Mortality in U.S. Adults,” American Journal of Public Health 99, no. 12 (2009): 4.

[11] Jeffrey H. Keefe, “Desperate Techniques Used to Preserve the Myth of the Overcompensated Public Employee,” EPI Issue Brief #294, March 10, 2011; John Schmitt, “The Benefits of State and Local Government Employees,” CEPR Issue Brief, May 2010.

[12] Nicholas D. Kristof, “Pay Teachers More,” NYT, March 12, 2011, WK10.

[13] A front-page article in the New York Times this past January painted a picture of widespread popular “outrage” against public-sector workers for clinging to outrageous salaries and benefits at the expense of the general public. Curiously, though, the article acknowledged that “[a] raft of recent studies found that public salaries, even with benefits included, are equivalent to or lag slightly behind those of private sector workers.” Thus, if people are truly “outraged” at public-sector workers, it would seem that journalists, politicians, and the corporate rich are largely responsible for cultivating that outrage through disinformation—a possibility that evidently escapes the article’s author (Michael Powell, “Public Workers Face Outrage As Budget Crises Grow,” January 1, 2011).

[14] Tom Juravich, “U.S. Recovery Might Need Public-Sector Unions,” Business Week, February 27, 2011; Robert Pollin and Jeffrey Thompson, “The Betrayal of Public Workers,” Nation (March 7/14, 2011), 21-22.

[15] See Baker, “Public Pensions 101.”

[16] Pollin and Thompson, “The Betrayal of Public Workers,” 20-21.

[17] Laura Flanders, “Capital or Community in Wisconsin,” Nation (blog), March 1, 2011.

[18] On New York see my “Shock Doctrine: New York”; on the state’s tax subsidies—which actually total $8.2 billion annually when the tax breaks of local governments are added—see the recent study by the Fiscal Policy Institute, The Growing Budget Burden of New York’s Business Tax Expenditures (December 7, 2010).

[19] Young, “Shock Doctrine: New York”; Thomas Kaplan and Michael Barbaro, “Cuomo Says Curbing Public Pension Benefits Will Be His Top Goal in ’12,” NYT, July 14, 2011, A20.

[20] Hahnel, The ABCs of Political Economy: A Modern Approach (London: Pluto, 2002), 155, citing Herman’s February 1996 article in Z Magazine; cf. Herman, “The Economics of the Rich,” Z Magazine (July 1997).

[21] A Brief History of Neoliberalism, 152-53, 192. Cf. Naomi Klein, The Shock Doctrine: The Rise of Disaster Capitalism (New York: Metropolitan, 2007).

[22] Pollin and Thompson, “The Betrayal of Public Workers,” 20;Stockman interviewed on CBS News’ 60 Minutes on November 1, 2010 (“Deficits: The Battle Over Taxing the Rich”). Emphasis added.

[23] CBO, Estimated Impact of the American Recovery and Reinvestment Act on Employment and Economic Output from April 2010 Through June 2010 (August 2010), 2.

[24] Dean Baker, “Feel No Pain: Why a Deficit in Times of High Unemployment Is Not a Burden,” CEPR Issue Brief, September 2010, p. 2; Robin Hahnel, “Election Redux: Learning From The 2010 Midterm Elections, Part 2: Lessons For The Left,” ZNet, November 8, 2010.

[25] Mark Weisbrot, “Failure to Enact Bigger Stimulus Was Fatal Mistake” (op-ed published in various local and regional papers, November 4-7, 2010).

[26] “Nobel Economist Joseph Stiglitz on Obama’s Stimulus Plan, Debt, Climate Change, and ‘Freefall: America, Free Markets, and the Sinking of the World Economy,’” Democracy Now! February 18, 2010. See Jack Rasmus, “Obama’s Failing Recovery,” Z Magazine (November 2010), for the figure of $225 billion.

[27] “Election Redux.”

[28] Mark Weisbrot, “Yes, There Are Ways to Reduce Unemployment and Revive the Economy” (op-ed published in various local and regional papers, February 3-13, 2011); IMF study cited in Paul Krugman, ­­­­­­“How to Kill a Recovery,” NYT, March 4, 2011, A27.

[29] Baker, “Manufacturing Deficit Fear.” On the remarkably low interest rates at the present time, see also Baker, “Feel No Pain,” 5.

[30] Baker and Rosnick explain the logic: “If we ran up debts so that we could finance schools and colleges, and make sure that our children and grandchildren were well educated, then we probably made them richer than if we didn’t run up debt but left them illiterate” (“7 Things You Need to Know About the National Debt, Deficits, and the Dollar,” 2).

[31] “Debt Reduction Will End This Presidency,” ZNet, July 15, 2011.

[32] “Nobel Laureate Joseph Stiglitz: Foreclosure Moratorium, Government Stimulus Needed to Revive US Economy,” Democracy Now! October 20, 2010.

[33] Binyamin Appelbaum, “Politicians Can’t Agree on Debt? Well, Neither Can Economists,” July 18, 2011, A11.

[34] Weisbrot, “Failure to Enact Bigger Stimulus”; Dimaggio, “Debt Reduction Will End This Presidency,” predicts that Obama’s attack on Social Security and Medicare may be the final straw since it will anger elderly voters.

[35] For a discussion of state fiscal policy see Peter Orszag and Joseph Stiglitz, “Budget Cuts Versus Tax Increases at the State Level: Is One More Counter-Productive Than the Other during a Recession?” Center on Budget and Policy Priorities, November 6, 2001.

[36] The richest one percent of income “earners” (about 741,000 households) are largely exempt from payroll taxes since most or all of their income comes not from wages/salaries but from interest, rent, stock dividends, capital gains, and similar sources. The additional tax revenue that results could also cover 3.4 million no-interest loans to homeowners facing foreclosure. See Rasmus, “How to Create 6 Million Jobs and Save 3.4 Million Homeowners with a Payroll Tax Increase,” ZNet, December 26, 2010.

[37] Rasmus, “Obama’s Failing Recovery”;Michael D. Shear, “In Speech to Chamber of Commerce, Obama Urges Businesses to ‘Get in the Game,’” NYT, February 7, 2011. See also Timothy R. Homan, “Rich Americans Save Tax Cuts Instead of Spending, Moody’s Says,” Bloomberg, September 14, 2010.

[38] On salaries for jobs created by military spending, see Robert Pollin and Heidi Garrett-Peltier, “The Wages of Peace,” Nation (March 31, 2008).

[39] See Hahnel, The ABCs of Political Economy, 128-59, esp. 142-47, 152-59.

[40] Economists Robert Pollin and Heidi Garrett-Peltier have studied this topic in depth. See, for instance, “The Employment Impact of U.S. Military and Domestic Spending Choices,” Security Spending Primer Fact Sheet #10 (2009); “The U.S. Employment Effects of Military and Domestic Spending Priorities,” International Journal of Health Services 39, no. 3 (2009): 443-60; “The Wages of Peace.”

[41] For historical overviews see Ha-Joon Chang, Bad Samaritans: The Myth of Free Trade and the Secret History of Capitalism (London: Bloomsbury Press, 2008), and Kicking Away the Ladder: Development Strategy in Historical Perspective (London: Anthem Press, 2002); Noam Chomsky, Year 501: The Conquest Continues (Boston: South End Press, 1993), 99-117.

[42] Mark Zepezauer and Arthur Naiman, Take the Rich Off Welfare (Monroe, ME: Common Courage/Odonian, 1996).

[43] UPI, “Saudi Arabia Eyes $60 Billion in U.S. Arms,” October 22, 2010; “Has Obama Assumed the Position of Salesman-in-Chief to China?” Democracy Now! January 20, 2011.

[44] Bad Samaritans, 28-29.

[45] E.g., David Leonhardt, “The Real Problem with China,” January 11, 2011; “A Newly Cooperative China” (editorial), January 21, 2011.

[46] Portions of this section are borrowed from my article “Shock Doctrine: New York.”

[47] Poll conducted from June 24-28, 2011, available here; see also Megan Thee Brenan, “Poll: Congress’s Top Focus Should Be Job Creation,” New York Times (blog), January 20, 2011.

[48] “Deficit-Attention Disorder: What Voters Really Think About Deficits, Debts, and Economic Recovery,” American Prospect (October 11, 2010).

[49] Stephen Kull, “Big Government Is Not the Issue,” WorldPublicOpinion.org, August 19, 2010.

[50] See the collection of poll results cited in my “Nurturing the ‘Healthy Nucleus’: Thoughts on How to Engage with the White Working Class,” Z blog, January 22, 2010. On recent media coverage implying widespread public antipathy toward unions, see Peter Hart, “Surprised by Solidarity in Wisconsin,” Extra! (April 2011).

[51] “Nurturing the ‘Healthy Nucleus.’”

[52] The Chairman of the polling agency, Globescan, commented with alarm that “American business is close to losing its social contract with average American families that has enabled it to prosper in the world. Inspired leadership will be needed to reverse this trend” (quoted in WorldPublicOpinion.org, “Sharp Drop in American Enthusiasm for Free Market, Poll Shows,” April 6, 2011). This “inspired leadership” will likely take its usual form of stepped-up funding of politicians and media organizations in order to influence public opinion and government policy.

[53] Stephanie Condon, “Poll: To Reduce Deficit, Most Americans Say Tax the Rich More,”CBS News (online), January 3, 2011.

[54] “Democrat Kathy Hochul Wins Special Election for New York’s 26th Congressional District Seat,” May 24, 2011.

[55] Steven Kull, Clay Ramsay, Evan Lewis, and Stefan Subias, How the American Public Would Deal with the Budget Deficit, February 3, 2011, pp. 7-8. For useful discussion of how the wording and context of recent polls affects results, see Carl Conetta and Charles Knight, “Are We Ready to Cut Defense Spending? What the Polls Say,” Huffington Post, February 8, 2011. Of particular importance is whether or not respondents are informed of how much money the US government actually spends on the military before they respond (most dramatically underestimate the real figure). Cf. Rasmussen Reports, “Voters Underestimate How Much U.S. Spends on Defense,” February 1, 2011.

[56] Reporting on Obama’s 2012 budget proposal released in February, the New York Times disingenuously wrote that the President’s budget “would reduce military spending.” Jackie Calmes, “Obama’s Budget Seeks Deep Cuts in Domestic Spending,” NYT, February 12, 2011.

[57] “Media Malpractice on the Debt Debate,” Fairness & Accuracy in Reporting (FAIR) blog, July 15, 2011.

[58] WorldPublicOpinion.org/Program on International Policy Attitudes, “American Public Says Government Leaders Should Pay Attention to Polls,” March 21, 2008.

[59] Hahnel interviewed by Alex Dougherty, “Digging in a Hole,” New Left Project, December 1, 2010.

[60] The literature on “participatory economics” is readily available, particularly from the “Parecon” section of the Z website; more detailed explanations can be found in Michael Albert and Robin Hahnel, The Political Economy of Participatory Economics (Princeton: Princeton UP, 1991); Albert, Parecon: Life After Capitalism (London/New York: Verso, 2003). For a very concise statement from the vantage point of New Yorkers’ struggle against budget austerity, see Organization for a Free Society, “Fighting Back, Looking Forward: An Alternative Vision of Economic Justice and Democracy,” May 2011.

[61] See Robin Hahnel, “Fighting for Reforms Without Becoming Reformist,” ZNet, March 25, 2005.


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