Federal Deficit Could Soar to Nearly $2 Trillion This Year: Will It Get the Economy Going?

The following  analysis by Adam Price is from Fight Back! News:

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San José, CA – On Jan. 7, the Congressional Budget Office (CBO) estimated that the federal budget deficit for this fiscal year (October 2008 to September 2009) would be $1.2 trillion. But the CBO estimate only counted the $68 billion approved for the wars in Iraq and Afghanistan, when they actually cost more than $186 billion in 2008. Given that the wars will cost at least another $100 billion, the federal budget deficit will be $1.3 trillion, or even more if the economy worsens more than expected. This estimated deficit is almost 10% of the Gross Domestic Product (GDP), which measures the value of all the goods and services* produced in the United States in a year, and would be the biggest deficit since World War II.

In addition, the Obama administration’s economic stimulus package will cost $800 billion or more over the next two years. Assuming at least $300 billion will be spent this fiscal year, the total federal budget deficit will be about $1.6 trillion, or about 12% of GDP. Obama’s economic advisors released a report on Jan. 10 estimating that their economic stimulus plan could create more than 3.5 million jobs.

Republicans and conservative Democrats are starting to complain about the size of the deficit. However this is pure hypocrisy, as they helped to double the federal government debt, borrowing some $5 trillion under the Bush presidency. When the deficits went to tax cuts for the wealthy, the invasion and occupation of Afghanistan and Iraq, or lending to banks it was not an issue. But now that there is talk about spending money on the unemployed, helping homeowners and creating jobs, the deficit is all of sudden a ‘big concern.’

This is the real question facing the United States: Will all this government spending work? Mainstream economists from the conservative Martin Feldstein, who served the Reagan administration, to liberal Paul Krugman, who has been a fierce critic of the Bush administration, have backed a huge increase in federal government deficit spending to try to stem the recession. These economists are taking up the ideas of John Maynard Keynes. Keynes argued during the Great Depression of the 1930s that there could be a “liquidity trap” where banks refuse to lend. This would make the monetary policy of trying to lower interest rates ineffective. Keynes said that the government must borrow and spend to get the economy going again. The economy today is caught in a vise between a deepening recession and a growing financial crisis, just as in the 1930s. With the free market economics of the last 30 years buried under the collapse of big banks, many are calling for a Keynesian economic policy.

Following the economic crisis of the 1970s the United States turned to what was known as ‘Reaganomics’ – with tax cuts for the rich (and tax increases for the working class in the form of higher social security taxes), deregulation of industry (laying the basis for first the savings and loan crisis of the late 1980s and then today’s financial crisis), anti-union policies and the offshoring of jobs to other countries. This restored corporate profits and economic growth, as the rich grew richer and the poor grew poorer, while the working class and even many professionals went deeper and deeper into debt to make up for the lack of wage increases. Businesses and the government also went on a borrowing binge, driving total debt from 1.4 the size of GDP in 1977 to 2.25 times the size of GDP in 2007. This big increase in debt was led by the financial sector, whose debt has increased five times faster than the growth of the economy during this time.

This borrowing binge allowed workers to buy more when their wages saw little or no growth (adjusted for inflation). It also provided a profitable outlet for the extra profits that the capitalists were making. However it did not prevent a growing overcapacity, where industry can produce more cars, homes and other goods and services than can be sold. The financial crisis that exploded last year has led to ‘deleveraging’ of many households, who are cutting back on borrowing and starting to pay down their debts. Businesses are also borrowing less, while financial debt is declining sharply due to defaults on loans and banks refusing to lend. This has led to the worst crisis of overproduction since the Great Depression.

Only the federal government has stepped up borrowing, lending and spending to try to prevent the economy from going into free fall. The problem is that a capitalist economy cannot keep going forever based only on more federal government borrowing and spending. When the Japanese stock and real estate markets crashed in the 1990s, the result was years of economic stagnation. The Japanese government has run huge deficits (relative to the size of their economy) for many years since then. The problem in Japan was not the large size of the deficits, nor the resulting increase in government debt, but rather that the huge increase in government spending was not able to get the economy moving again. Even coupled with interest rates that have been less than one percent since 1995, the Japanese economy never was able to get back to steady economic growth. The only sector that had done well was exports, which are now falling due to the worldwide recession.

The United States is now following the same policy as in Japan. But if government deficit spending didn’t work in Japan, why should it work in the United States today? This is particularly true for the U.S. government, which has had to borrow 75-100% of past deficits from investors, insurance companies, pension funds and banks in other countries. In contrast, Japan has a higher savings rate, which makes their government able to borrow at home. At some point the rest of the world could cut back on purchases of U.S. government bonds, leading to higher interest rates and more economic pain in the United States. The only other option would be for the U.S. Federal Reserve to print more money to buy U.S. government bonds, putting the value of the U.S. dollar at risk and possibly leading to much higher inflation.

Many are comparing Obama’s economic stimulus with the Depression-era New Deal. The New Deal started many government programs that helped working people, such as Social Security, unemployment insurance and welfare. However it was not able to reduce unemployment back to pre-Depression levels. More government spending – for the unemployed, homeowners facing foreclosure and jobless workers – will help people, but won’t cure the economy. The economy faces a bleak future of continued high unemployment and/or the threat of higher inflation. Even the Obama economic team admits that with the economic stimulus, unemployment will remain above 7% for two more years! What is needed is an economy not based on private profit – a socialist system that would serve the interest of working people.

*GDP only counts final goods and services, for example the value of a book printed in the United States, and not the value of the paper that went into the book, or the trees that went into the paper, in order to avoid double and triple counting.

12 responses to “Federal Deficit Could Soar to Nearly $2 Trillion This Year: Will It Get the Economy Going?

  1. Comradezero, why, as communist, are you publishing without comment this article? This is not a communist analyse.
    It leads to a rather poor conclusion:
    “What is needed is an economy not based on private profit – a socialist system that would serve the interest of working people.”

    The world (and so the USA, but also Europe) is already a long time in a overcapacity crisis:
    Capitalism can just prolonge its existence by increasing the exploitationlevel and with repression (and war) against revolt of the workers – – and that is the main goal of the building of the STATE-apparatus, so the USA or the European Union. The workers in a revolt that is spontaniously against the direct result of the increased exploitiationlevel, have to be educated (by participating in their struggle and then discussing about the need to finish with imperialism (a discussion of course in parts and based on the experiences in the struggle). This way of doing had to be done since the communists (in the USA but also in Europe) conclude in the 70ties that worldimperialism is in a fundamental crisis, out of wich it can not restore itself, only prolonge its existence by higher exploitation and war.
    So being present as a worker in all kinds of class struggle, you have to try to raise the spontaneous economist level of the strike or other forms of class struggle, as much as possible and in the mind of as much of people as possible. The most advanced workers with whom you have struggled and discussed had to be organised in the communist party.
    The communist party (of the USA in your case, of Europe in our case) has to work on a CONCRETE program that give perspective how the workers can make revolution, how they will expropriate the capitalists and how they will transform a commodity production system in a production in function of needs (a socialist planeconomy) and how they will build the proletarian dictatorship on the remains of the distroyed imperialist state (the USA and the European Union) The workers have to organise themselves (led by their increasing conscience and led by the vanguard organisation of the working class), in function of the revolution they have to undertake: so in one strong combative anticapitalist MASS organisation of workers (of the USA in your case, of EUROPE in our case). The already existent union organisations are the bases out of wich that one mass organisation of workers will be build.

  2. I’m afraid I don’t understand your point. You think it is a “poor conclusion” to say that we need a socialist system?

  3. The parties of de Second International said also “we need a socialist system”
    Kautsky said also: “we need a socialist system”
    Emile VandeVelde said: “our objective is the proletarian dictatorship!”
    The REFORMIST social democratic parties pretend now on this moment in de light of the financial crisis also that “capitalism has failed, there is a socialist alternative”

    But in no way it was made clear and concrete what that socialism was or what that “socialist alternative” really is.
    And they “used” and are “using” the force of the working class, not to direct it to revolution but “deviated” via very “left sounding” slogans to reform INSIDE capitalism, so not to bring in danger the existence of capitalist order. They are “honored” by the capitalist system with the possibility to get jobs and chosen posts IN the capitalist system.

    And than I tried to make clear what I find what the strategie (en with it the tactic) should be of the communists…. But of course that is my opinion. And we can discuss about it.

  4. So then you are of the opinion that every single article needs to outline what socialism is, what the dictatorship of the proletariat is, and what the tactics of communists should be?

    Maybe you should read the chapter on Pravda in the HCPSU.

  5. This is not the way that I like that a discussion is developing.
    It is for me not the matter to find in marxist books a text or a quote that I can use to prove my right.
    For then I can say, read the chapter (http://www.marxists.org/archive/lenin/works/1901/witbd/v.htm) out of “What is to be done” about the role a newspaper has to play (as Lenin sees it) for building out the conditions for, and preparing the working class for revolution.
    What is your OWN opinion, based on marxist analyse (and marxism is a SCIENCE, not an encyclopedia)?
    But perhaps are you a little annoyed about my way of formulating. To sharp? To much black-white? Well sorry then. But English is not my own language and of course in a comment, I am writing condenser and more spontaneously.

  6. It is true. “What is to be Done?” was the theory behind Iskra, a paper for the advanced. Pravda (which Lenin initiated and Stalin organized) targeted the working class more broadly, reaching out not only to advanced workers, but to broad sections of the intermediate as well.

    I think there is a place for each.

    I don’t think every article needs to be a program. I think class consciousness can be built up among the working class from many different angles. And I think agitation and propaganda for the advanced should have a different character than agitation and propaganda for the intermediate.

  7. I think that you cannot place “agitation and propaganda for the advanced” so apart from “agitation and propaganda for the intermediate”. I find this undialectical.

    I read quickly the text about the Pravda where you give the link to.
    I find in THAT text a CONCRETE “propaganda and agitation”- solution in a CONCRETE situation. AND trying to give as much as possible “advanced” propaganda for as much as possible “intermediate” worker masses…. And perhaps in our days this would be a popular website that everybody can read and posted comments on and participate in discussions. (your website is perhaps a good example!)

    The article in “Fight Back” was concieved as a FUNDAMENTAL analyse (not an living article about a strike or so). So to my opinion in such an article, you have to just to give as much as possible concrete proposals how the workers should organise themselves for the urgent necessary revolution (as the ONLY solution to put an end on all that misery) and what are the CONCRETE struggle objectives that go as much as possible in the direction of the revolution. (… and I know that you are thinking now: “Well Nico, give an example yourself” – I am working on it)

    I think that Lenin in “what to be done” was thinking for a newspaper that had, AND the function of the “Iskra” AND the function of what later became the “Pravda”, at the same moment.

  8. While carrying out work with the advanced workers is important, anyone who understands conditions in the US can’t see it as our first task.

    In the History of the CPSU, the situation in Russia when Lenin wrote “What is to be done?” was described as, “The end of the nineteenth century in Europe was marked by an industrial crisis.”

    We have that in common, but the comparison ends there. The description continues, “Industrial crisis and unemployment did not halt or weaken the working-class movement. On the contrary, the workers’ struggle assumed an increasingly revolutionary character.”

    Class consciousness in the US is at an historic low. We have the task of getting workers to stand together and fight, like the Republic Windows and Doors workers here in Chicago. For that, we need a paper that speaks to the workers where they are at; that sums-up and promotes the experiences of other workers in struggle; and that helps the workers to start to understand the world around them.

    Remember also that the education system in the US is failing the working class very badly. Articles for our newspaper are written for workers, not graduate students.

    My co-workers like the articles in Fight Back and often quote things back to me that they find in the paper. Other left group newspapers are seen as ‘court stenography.’

  9. Joe, thank you for your answer
    Allthough I am not changing totally my point of view yet (that I developed in my comments here above), you give me concrete information about the situation of the majority of the working class in the USA and how the communists of the USA see their tasks.
    That give me at least material to think about.

    Ok, I have a perhaps subjective view from a distance – out of Europe, living in a part of Europe where the majority of the workers are schooled, more or less good informed (of course by media that are controlled by capital – but even the bourgeoisie wants to be good informed).
    The level of development of the class struggle is politically not so high (so that is comparative perhaps with the USA) – however in some memberstates of the European Union(Greece and France) it is quick increasing!
    But newspapers of (former) communist organisations, and the role of that newspaper, were more or less concieved as now for example Fight Back. (and in countries as France and Greece still are!)
    But some of those (former) communist organisations (where I was myself member of) has developed by the way of “tolerating” opportunist views on the role of the newspaper, the working in the working class, role of taking leading positions in class struggle, etc…. developing then plain revisionism, to become (at the end) REFORMIST organisations (the WPB of Belgium and de SP of the Netherlands are examples of that)
    All this “explains” my more or less “worried” reactions and comments.
    For example it seems to me that Freedom Road Socialist Organisation sees the WPB still as a communist sister-organisation and the analyses by cadres of the WPB as real marxist analyses. That is of course the right of FRSO, and it is not to me to forbid that. But I give comment when I think to see some concrete opportunist developments, when I think that they are similar once in the WPB, but when it was still authentic communist.
    For me there was after 1995 in the WPB an increasing of opportunism of which I was myself not aware at that time, in 2004 this allowed to a revisionist group of cadres to take over the leadership of the party and in 2008 on its 8 congress in fact the reformist character is “accepted” by a majority of members who were clearly misled and had developed a wrong conception about marxism
    My fundemental critic on the party line began in 2000, in 2005 I am expelled.

    But it is comforting to see that you are not going any discussion out of the way! Such a discussion it is not anymore possible to do with (ex) comrades in the WPB of with the WPB itself. Comments from me on articles and point of views on the website of the WPB are not posted (and so surely not answered or even not criticised).

    But there will surely in Europe be once again a grouping of communists: in different memberstates there are working different authentic communist organisations (similar as FRSO in the USA)
    My opinion is that as revolution will be in the whole European Union the different communist organisations have to organise a European communist party with a program for revolution and building socialism in the European Union.

  10. Nico, you might also be interested in reading this new pamphlet from the Labor Commission of the FRSO, Build a Fighting Workers Movement.

  11. Very interesting indeed. I loaded it down and will read it with attention.
    Greetings.

  12. Perhaps for you (and FRSO) the following weblog is interesting. It is in french. It is about a movement inside the union CGT. The weblog is from unionists member of the communist organisation VP-Partisan. But they are not openly known as member. They are working more or less “undercover”.
    The website “Ou va la CGT”: http://ouvalacgt.over-blog.com/
    The website of VP-Partisan (an organisation similar to FRSO – in France): http://vp-partisan.org/

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