The Impending Economic Disaster

Brad DeLong's Semi-Daily Journal: On the Deficit

On the eve of a titanic partisan clash in the Senate, eggheads of the left and right got together yesterday to warn both parties that they are ignoring the country's most pressing problem: that the United States is turning into Argentina.... Stuart Butler, head of domestic policy at the conservative Heritage Foundation, and Isabel Sawhill, director of the left-leaning Brookings Institution's economic studies program, sat down with Comptroller General David M. Walker to bemoan what they jointly called the budget "nightmare."


There were no cameras, not a single microphone, and no evidence of a lawmaker or Bush administration official... they agreed that without some combination of big tax increases and major cuts in Medicare, Social Security and most other spending, the country will fall victim to the huge debt and soaring interest rates that collapsed Argentina's economy and caused riots in its streets a few years ago. "The only thing the United States is able to do a little after 2040 is pay interest on massive and growing federal debt," Walker said. "The model blows up in the mid-2040s. What does that mean? Argentina."


"All true," Sawhill, a budget official in the Clinton administration, concurred.


"To do nothing," Butler added, "would lead to deficits of the scale we've never seen in this country or any major in industrialized country. We've seen them in Argentina. That's a chilling thought, but it would mean that."

Has Bush started a debacle that threatens to unravel everything good about America? It would appear so. What started out as a strategy to "starve the beast" of the federal budget by running up huge deficits, has led to a politically untenable situation. Do the right thing, and commit political suicide. Bush is not about to do that. Nor is the majority of our elected leaders.
Why is that? How can they be so callous? Isn't their children's future also on the line? Maybe not. The extreme right has always been hoping to role back the FDR reforms: Social Security, and federal intervention in the economy through bank regulation, Supreme Court "Activism" and federal programs creating jobs. There are other more dubious examples of LBJ's legacy that are often inappropriately dumped in the FDR pile.
What we have happening before our eyes is a massive redistribution of wealth and political power. Over the past year, I've talked about this economic revolution under the rubric of Corporate Welfare here, here, here, here, and here.
The real intent is embedded in this quote from a Cato Institute publication "Class Struggle?":

A kernel of truth within the income mobility confusion is that good parenting matters to a child's lifetime success. Economics Nobel laureate James Heckman notes that "good families promote cognitive, social and behavioral skills," but "single parent families are known to produce impaired children who perform poorly in school, the workplace and society at large." Yes, there are many attentive parents with low incomes who spend hours reading to toddlers, and there are negligent parents with high incomes. But many dysfunctional families do have low incomes, and collecting more taxes from functional families in order to send more transfer payments to dysfunctional families can have perverse results. Mr. Heckman points out that "generous social welfare programs . . . discourage work and hence investment in workplace based skills. . . . Subsidizing work through the EITC . . . can reduce the incentives to acquire skills and so perpetuate poverty across generations."

What seems to make sense on it's face, carries with it ominous consequences for the majority of Americans. Basically, this philosophy was espoused in an article about banking reform, specifically advocating the deregulation of the banking industry that began under FDR. The ultimate goal of that move is to transfer the risk of the banking industry, currently bore by the banking industry under FDIC, to the depositor. Should banks collapse, depositors will lose their money. That means the average depositor, the middle class. In
Argentina, the middle class shrunk precipitously because jobs disappeared. Wages could not keep up with hyperinflation.

Although there was economic growth in Argentina in the 1990s, the increase in living standards for the masses of Argentines was very unequal. While a small fraction of Argentines may have been able to purchase the latest consumer goods, send their children to private schools, and occasionally take vacations abroad, the situation for most people in Argentina was far different. The official unemployment rate was over 10% throughout the 1990s. Official unemployment is now about 20% or more, and underemployment is 35%. In 1975, the poverty rate was about 10%--now the poverty level is around 40%.


The middle class has been affected by the privatization of state companies and the "austerity" plans that hit state workers particularly hard. In late February, the government announced it would not pay the full salaries of over 500,000 state workers. These workers have already had their pay and pensions cut under various economic "adjustments" ordered by the government. State workers had their wages cut 13% in July of last year. Retirees from state government have had their pensions cut by a similar amount. Now the government is saying it simply won't pay state workers at all. In addition, the Argentine government essentially stole $3.5 billion from state workers' pension funds to make a debt payment.


One principal of an elementary school said, "Being in education used to allow for middle-class living. But now I have teachers who have to sell their car to make it, and parents who take their kids out of school so they can work for the family's short-term survival."


The working class and poor have been hit even harder. Hunger has become widespread. Much of the "unrest" in December involved the looting of grocery stores by hungry people. People have been bartering clothes for food. Pacific News Service reports that "hundreds have resorted to selling their own hair to a wig store..." Independent plumbers and electricians haven't had a call in weeks because people don't have any money to pay for services or, due to the government's policies, are unable to withdraw enough money from bank accounts. It's estimated that workers at private companies have seen their wages decline by 20% since 1998. Average per capita income has fallen by about 14% during the recession.

[...]
The structure of Argentine business has changed dramatically over the last decade of "reform" and crisis. It is estimated that 38,000 medium-sized enterprises in Argentina operated by the petty bourgeoisie over the 1990s either went bankrupt or were saddled by crippling debt. Many more small businesses are now facing bankruptcy. In the early 1980s about a third of big enterprises were foreign-owned--in 2000, about two-thirds of big enterprises were foreign-owned.

The parallel between the US and Argentina is staggering.
One principle of political power is that people focused on survival rarely find the energy or relevance of voting, thus the concept of the politically disenfranchised. The larger the mass of unvoting Americans, the more power the rich have, the more like a plutocracy America becomes. Then the disenfranchised are left to take care of themselves in a process called "social Darwinism".
Back in the 1800's the rich had the upper hand and the religious people of America led the fight against social Darwinism as "evil". Social Darwinism was at the basis of Nazi philosophy and became an argument against welfare:

This idea eventually led to a variety of practices and beliefs, e.g., Nordic Racism, used by German anthropologists and later Nazi theoreticians. It also led to eugenics in which, it was believed, the unfit transmit their undesirable characteristics. A breeding program for human beings would see to it that the unfit did not transmit their undesirable characteristics.


Another application of a biological concept to human behavior was the notion that any attempt to provide welfare for the poor was a tragically misguided mistake. Feeding or housing the poor simply permitted them to survive and to transmit their unfitness to their children, who in turn would pass it on to their children. A spurious piece of sociology about two families known as the Jukes and the Kallikaks purported to trace a race of criminals and prostitutes to two persons in the Revolutionary War. This study was used for many years to demonstrate that "inferiority" was inherited.

In the 1800's, the Social Darwinists were condemned by Christian leaders as advocating survival of the fittest at the expense of the weak and disabled. Over one hundred years later, Christian Rightwing extremists bent on power and influence have perverted the Righteousness Of Divine Retribution as justification to abandoned the disabled to natural selection.
In the Dark Ages, disability was equated with being possess by the devil. Today, the disabled have been condemned for not having enough faith to be healed by God. Lack of faith has been equated with evil. And the disabled are abandoned to their fate. The conclusion the greedy draw has become the conclusion of those who dare call themselves "righteous".