The "fiscal
cliff" has all the earmarks of a false flag operation, full of sound and
fury, intended to extort concessions from opponents. Neil Irwin of
The Washington Post calls it
"a self-induced austerity crisis." David Weidner in
The Wall Street Journalcalls it
simply theater,
designed to pressure politicians into a budget deal: "The cliff is
really just a trumped-up annual budget discussion... The most likely
outcome is a combination of tax increases, spending cuts and kicking
the can down the road."
Yet
the media coverage has been "panic-inducing, falling somewhere between
that given to an approaching hurricane and an alien invasion." In the
summer of 2011, this sort of media hype succeeded in causing the Dow
Jones Industrial Average to plunge nearly 2000 points. But this time the
market is generally ignoring the cliff, either confident a deal will be
reached or not caring.
The
goal of the exercise seems to be to dismantle Social Security and
Medicare, something a radical group of conservatives has worked for
decades to achieve. But with the recent Democratic victories, demands
for "fiscal responsibility" may just result in higher taxes for the
rich, without gutting the entitlements.
The
problem is that no deal is going to be satisfactory. If we go over the
cliff, taxes will be raised on everyone, and GDP is predicted to drop by
3 percent. If a deal is reached, taxes will be raised on some people,
and some services will be cut. But the underlying problems -- high
unemployment and a languishing economy -- will remain. More effective
solutions are needed.
Be Careful What You Wish for: Fiscal Hostage-Taking Could Backfire
Taxpayers
and governments that are pushed too far have been known to resort to
more radical measures, and there are some on the table that could fix
the problem at its core. Here are a few that are receiving media
attention:
1.
A financial transactions tax.
While children's shoes and lunchboxes are taxed at nearly 10 percent,
financial sales have so far gotten off scot-free. The idea of a
financial transactions tax, or Tobin tax, has been kicked around for
decades; but it is now gaining real teeth. The European Commission
has backed plans from 10 countries --
including France, Germany, Italy and Spain -- to launch a financial
transactions tax to help raise funds to tackle the debt crisis. Sarah
van Gelder of
YES! Magazine observes that
the tax would not only help reduce deficits but would hit the highest
income earners, and it would cool the speculative fever of Wall Street.
Simon Thorpe, a financial blogger in France, cites figures from the Bank for International Settlements,
showing total U.S. financial transactions of nearly $3 quadtrillion in 2011. Including other sources, he derives
a figure of $4.44 quadrillion. Even
using the more "conservative" $3 quadrillion figure, a tax of a mere
0.05 percent (1/20th of 1 percent) would be sufficient to raise $1.5
trillion yearly, enough to replace personal income taxes with money to
spare.
2. The trillion dollar coin trick.
If Republicans insist on the letter of the law, Democrats could respond
with a law of their own. The Constitution says that Congress shall have
the power to "coin money" and "regulate the value thereof," and no
limit is put on the value of the coins Congress creates, as was pointed
out by a chairman of the House Coinage Subcommittee in the 1980s.
I
actually suggested this solution in Web of Debt in 2007, when it was
just a "wacky idea." But after the 2008 banking crisis, it started
getting the attention of scholars. In a Dec. 7
article in
The Washington Post titled
"Could Two Platinum Coins Solve the Debt-ceiling Crisis?," Brad Plumer
wrote that if Congress doesn't raise the debt ceiling as part of the
fiscal cliff negotiations, "then some of these wacky ideas may get more
attention."
- The Treasury mints a1 trillion coin, or whatever amount is desired.
- The Treasury deposits the coin into the Treasury's account at the Fed.
- The Treasury buys back bonds.
- The retirement of bonds is an asset swap, no different from QE2.
- The increase in reserve balances is not inflationary, as Credit Easing 1.0, QE 1.0, and QE 2.0 already have shown.
- These operations by the Treasury create no new net financial assets for the non-government sector.
- The debt ceiling crisis is averted.
Plumer
cites Yale Law School Professor Jack Balkin, confirming the ploy is
legal. He also cites Joseph Gagnon of the Peterson Institute for
International Economics, stating, "I like it. There's nothing that's
obviously economically problematic about it."
To the objection that it is a legal trick that makes a mockery of the law,
Paul Krugman responded,
"These things sound ridiculous -- but so is the behavior of
Congressional Republicans. So why not fight back using legal tricks?"
3.
Declare the debt ceiling unconstitutional.
The 14th Amendment to the Constitution mandates that Congress shall pay
its debts on time and in full, and Congress does not know how much it
will collect in taxes until after the bills have been incurred. The
debt ceiling was imposed by a statute first passed in 1917 and revised
multiple times since.
The Constitution trumps it and should rule.
4.
Borrow interest-free from the government's own central bank.
If the government refinanced its entire debt through the Federal
Reserve, it could save nearly half a trillion dollars annually in
interest, since the Fed rebates its profits to the government.
The Fed's newly-announced QE4 adds
$45 billion monthly in government securities purchases to the $40
billion for mortgaged-backed securities declared in QE3, and no time
limit has been designated for ending the program. Forty-five billion
dollars monthly is over half a trillion yearly. Added to the federal
debt already held by the Fed, the whole $16 trillion federal debt could
be bought back in 28 years.
This is not a wild, untested idea. Borrowing interest-free from its central bank was
done by Canada from 1939 to 1974,
by France from 1946 to 1973, and by Australia and New Zealand in the
first half of the 20th century, to excellent effect and without creating
price inflation.
5.
Decommission some portion of the military. When past costs are factored in, nearly half the federal budget
goes to the military. The data speaks for itself.
6.
Debt forgiveness. Economists Michael Hudson and Steve Keen maintain that the only way out of debt deflation is debt forgiveness. That
could be achieved by
the Fed by buying up $2 trillion in student debt and other asset-back
securities and either ripping them up or refinancing the debts
interest-free or at very low interest. If the banks can borrow at 0.25
percent, why not the people?
7.
Publicly-owned state and local banks. Municipal governments are facing cliffs of their own. Ann Larson, writing in
Dissent Magazine,
blames predatory
Wall Street lending practices. Debt financing of U.S. cities and towns
by Wall Street, she says, has inflicted deep and growing suffering on
communities across the country.
Predatory
Wall Street practices can be avoided by establishing publicly-owned
state and local banks, which leverage the public's funds for the benefit
of the public. The profits are returned as dividends to the local
government. German researcher Margrit Kennedy calculates that a whopping
40 percent of the cost of public projects, on average, goes to
interest. Publicly-owned banks slash borrowing costs by returning this
interest to the government, along with many other advantages, detailed
here.
Unshackle the Hostages and Let the Good Times Roll
The
fiscal cliff has been said to be holding Congress hostage to
conservative demands, but the real hostages are the debt slaves of our
financial system. The demand for "fiscal responsibility" has been used
as an excuse to impose radical austerity measures on the people,
measures that benefit the 1 percent while locking the 99 percent in
debt.
The
government did not demand fiscal responsibility of the failed financial
sector. Rather, Congress lavished hundreds of billions of dollars on it,
and the Fed lavished trillions more. No evident harm from these
measures befell the economy, which has fared better than the
austerity-strapped EU countries. Another couple of trillion dollars
poured directly into the real, productive economy could give it a
serious boost.
According to the Fed's figures, as of July 2010, the money supply was actually
$4 trillion less than in 2008. (The
shrinkage was in the shadow banking system formerly reported as
M3.) That means $4 trillion could be added back into the money supply
before general price inflation would be a problem.
The
self-induced austerity crisis is a diversion from the real crises,
including unemployment, the housing crisis, a bloated military, and
unrepayable debt. Slashing services, selling off public assets, and
raising taxes won't cure these ills. To maintain a sustainable and
productive economy requires a visionary leap into the new. A new economy
needs new methods of public financing.
First posted on Truthout.org.
