by Michael Roberts
President Obama’s administration announced its proposed budget for
the year beginning October 2014. The US Congress is paralysed between a
Republican majority in the House of Representatives and a Democrat
majority in the Senate. So the Obama budget won’t get through in its
present form. Nevertheless, that is not a lot to choose between the two
parties on their objectives for the budget and public sector spending
for next year and onwards. Both sides agree that governments deficits
are too large and public sector debt levels must be reined in. The
difference is that the Republicans want no tax increases to do it, while
the Democrats want some. But both agree that welfare spending is ‘too
high’. So just as in the UK with the Conservative-led coalition, Obama
proposes sweeping reductions in real federal spending on the poor,
unemployed, the sick and the old.
One of the most pernicious measures proposed is to change the
inflation index used to increase state social security pensions and
welfare payments. I have commented on the iniquity of this before (see http://thenextrecession.wordpress.com/2012/12/27/the-fiscal-cliff-okuns-law-and-the-long-depression/).
The impact of using the so-called ‘chained CPI’ to index pensions will
be to reduce annual increases in pensions and tax thresholds by 5% over
12 years, hitting living standards for average American households six
times more than the rich. Over a course of an average retirement, future
pensions would be reduced by 10%. Of course, it is even worse with the
Republican proposals for the budget,which combine tax cuts for the
better-off with a huge reduction in federal spending, by half in cash
terms and by 20% of GDP by 2023.
But apparently there is no alternative as the US economy cannot
afford decent pensions that people have paid into through social
security contributions over their working lives and/or proper federal
public services and Medicare etc. We cannot afford them, even at their
current meagre levels, because we are all getting older and living
longer and the workforce as a share of the total population is
shrinking, even if it was fully employed (which we know it is not). So
there is no way around either reduced pensions, or higher contributions
or a longer period staying at work, or all three. Across the major
capitalist economies, pension and welfare ‘reform’ is the order of the
day and on the agenda of every government, whether ‘centre-left’ or
But is it unaffordable? Well I wrote about this issue in an earlier post (http://thenextrecession.wordpress.com/2011/12/03/the-pensions-myth-part-one/)
and tried to show that if economies just raised their long-term annual
output growth just a little, even just 1% a year more, the ‘problem’
would disappear. Recently, John Cochrane, a leading neoclassical
mainstream economist and backer of the Republicans, came out with the
same point (http://johnhcochrane.blogspot.co.uk/2013/03/fun-debt-graphs.html). As he put it: “Suppose
growth is 1% and then 2% greater than the CBO (budget office) projects.
What effect does that have? To keep it very simple, I assume that
spending stays the same, and revenue stays the same fraction of GDP.
Thus, I just divide spending/GDP by a 1% and then 2% growth rate
(e^(0.01 t)) and we have the new spending as a fraction of the larger
GDP. ” His graph repeated below shows that government spending
(without ‘reform’) as a percentage of GDP falls from an expected 45% in
30 years time to below where it is currently (23%) if US real economic
growth is just 2% pts a year faster than currently projected over the
long term. And the budget deficit (the difference between spending and
revenues) would also be insignificant.
So just an increase in the US projected growth rate from 2.5% a year
over the next 30 years to 4.5% a year would allow the Federal government
to sustain current pensions and welfare spending without changing
spending or taxation revenues as a share of GDP at all.
But of course, such a long-term growth rate in any of the major
capitalist economies is a pipe-dream. Long-term trend real GDP growth
has steadily declined over the last 50 years and is likely to continue
to do so over the foreseeable future (see my post, http://thenextrecession.wordpress.com/2012/09/12/crisis-or-breakdown/). In reality, the global capitalist economy is in a Long Depression, or as the FT put it, “stuck in a rut, unable to sustain a decent recovery and susceptible to a sudden stall”. At least that is the estimate of the latest Brookings Institution-Financial Times Tiger
(Tracking Indexes for the Global Economic Recovery) as it is called.
The world economy is sluggish with the advanced economies flat-lining
and the emerging capitalist economies growing below trend compared to
before the Great Recession (see graph below).
Of course, the likes of Paul Ryan in the US or the Conservatives in
Britain would not improve pensions, welfare or Medicare anyway. They
would always argue that there was not enough money or resources to do so. And
it would be best for the poor, vulnerable and sick to have an
‘incentive’ to work by reducing their benefits or pensions. That
contrasts with the view that the best way to incentivise the rich is to
reduce their taxes, raise their bonuses and stop trying to ‘regulate’
So the myth of the social security ‘scroungers’ is perpetuated and
promoted on both sides of the Atlantic pond. I dealt with this issue
in the UK context in a recent post (http://thenextrecession.wordpress.com/2012/10/08/who-are-behind-the-blinds-george/).
But the New Economics Foundation has just released an excellent paper
exposing the fallacies and lies perpetrated by the British government in
its drive to persuade people that there are too many ‘shirkers and
scroungers ‘living off the rest of us’ and unwilling to work (Strivers_vs._skivers_online).
As the authors of the paper put, the lies are :“There are two
distinct groups of people, one good and one bad; individuals choose to
be in one group or the other. ‘Strivers’ work hard and put money into
the economy while ‘skivers’ are just lay-abouts who take money out.
Claiming benefits traps people in dependency, which is a social evil,
passed from one generation to the next. People not in paid work
contribute nothing of value to society.”
In reality, people slip between employment and unemployment, often
within the space of a few months, as the economy relies increasingly on
short-term, low pay, insecure contracts. This happens even more in areas
where the economy is especially weak. The vast majority of those who
are not in paid employment are unable to work because they are disabled
or have caring responsibilities, or because there are no jobs available.
Even in the best of times, it is harder for disabled people and carers
to find suitable employment. A far greater proportion of social
expenditure is spent on people in paid work, through working tax
credits, than is spent on the fit and able-bodied unemployed. Only 2.6
per cent is actually spent on the able-bodied unemployed (see graph).
For the first time ever in the UK, in-work poverty has overtaken workless poverty, with 6.1 million people in working households living in poverty.
Instead of tackling the problem of low income, the government is
subsidising employers offering poor quality employment through working
tax credits. Taxpayers are picking up the bill by topping up wages so
that paid workers can feed and house themselves and their families. The
vast majority of people claiming Job Seeker’s Allowance do not claim
over the long-term. Less than half claim for more than 13 weeks and only
10 per cent of all claimants claim for more than a year. And a great
many people who are not in paid employment do valuable unpaid work,
caring for others, bringing up children and looking after their
families, homes and neighbourhoods. The formal economy would grind to a
halt without it. Even if time spent on child care and housework were
paid no more than the minimum wage, it would still be worth the equivalent of 20 per cent of GDP. Many people are not in paid work because they
have prior responsibilities that involve unpaid labour. These so-called
‘skivers’ contribute a great deal more than nothing for the something
So there it is. Reduced pensions, reduced public services, reduced
welfare and health services – because capitalism cannot afford them.
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