January 04, 2010
Dean Baker
Truthout, January 4, 2010
See article on original website
We need to cut the budget deficit because the foreigners are taking over. That is the word according to a new report, “Red Ink Rising” from a commission financed by the Peter G. Peterson Foundation and the Pew Foundation. The commission warns us that foreigners now hold almost 50 percent of the national debt. This is one of the main points of its stern warning that we must get the deficit under control.
Before anyone gets too concerned about the foreign menace, it is important to consider the source of this report. The Peter G. Peterson Foundation was founded by Peter G. Peterson, the billionaire Wall Street tycoon and former Nixon Commerce Secretary. Peterson has a long history of funding efforts to cut Social Security and Medicare. Before his latest foundation venture, he started the Concord Coalition and wrote books with menacing titles like “Gray Dawn,” that foretold of the demographic disaster that would be created by the retirement of the baby boom cohort.
The Pew Foundation, its partner in this exercise, is perhaps best known for its efforts to hype scary stories about Social Security in the mid-90s. Back then it spent tens of millions of dollars on “Americans Discuss Social Security,” an effort to promote the view that the Social Security system was in imminent financial danger and demanded the country’s immediate attention.
The economic crisis caused by the collapse of the housing bubble has temporarily pushed the deficit to unsustainable levels. This deficit is primarily due to the lost tax revenue and unemployment benefits that are associated with double-digit unemployment, in addition to the bailout bucks for the failed banks.
Of course we would not be in this situation if anyone had listened to warnings about the dangers of the housing bubble before it was too late. Unfortunately, the Peterson-Pew types were using their money and influence to drown out these warning – hyping instead their concerns about deficits. Thanks to their incompetence as economic analysts, we now have much greater deficit concerns today than we did when they made these warnings a few years ago.
However, the devastation caused by the collapse of the housing bubble weakens rather than strengthens the case for their agenda. For example, the idea of cutting Social Security for any current or near retirees becomes absurd in a context in which tens of millions of middle class families have just seen much of their wealth destroyed with the collapse of housing values and the plunge in the stock market. The same applies to cuts in Medicare.
But the Peterson-Pew crew does not feel the need to stick to reality in pushing its agenda; hence the focus on the foreign ownership of the government debt. This is obviously intended to scare people with the prospect that evil foreigners will control our destiny.
However, if we can get the distinguished members of this commission to look at an intro econ book, they will discover that the acquisition of U.S. assets (like government bonds or stocks) by foreigners is determined by the trade deficit, not the budget deficit. In other words, the reason that foreigners are buying up hundreds of billions of dollars of U.S. financial assets (public or private) is because we have a huge trade deficit, not a budget deficit. (Arguably the causation goes in the other direction, but the accounting identity is between the trade deficit and foreign purchases of U.S. assets.)
The trade deficit is in turn determined by the value of the dollar. People in the United States buy imported goods at Wal-Mart because the high dollar makes them cheap, not because of the budget deficit. Remarkably, the Peterson-Pew gang doesn’t mention either the value of dollar or the trade deficit even once in its report.
Its agenda is going after the budget deficit, including Social Security and Medicare, not seriously addressing the problem of foreign indebtedness. If it requires being a little disingenuous to do so, these folks will rise to the challenge.
The other notable place where this group plays fast and loose with the facts is warning that future generations could experience lower standards of living because of the government debt. There are no plausible projections that show future generations experiencing worse standards of living on average than we do at present due to the debt.
Many families may see declines in living standards due to a continuing rise in inequality. However inequality is not mentioned in the Peterson-Pew report. It is possible that the environmental damage from global warming could also reduce future living standards, but the environment is also not mentioned in this report. When you’ve got a line to push, why let the facts get in the way?
So, the question confronting the American people is whether we are going to allow the Wall Street crew that wrecked the economy to come back and take away our Social Security and Medicare? If the answer is yes, sign up for the deficit commission being pushed in Congress by the Peterson-Pew crew. On the other hand, if you don’t think Wall Street should get every last penny, you might want to let the Congressional proponents of this commission know how you feel.
Dean Baker is the co-director of the Center for Economic and Policy Research (CEPR). He is the author of Plunder and Blunder: The Rise and Fall of the Bubble Economy. He also has a blog on the American Prospect, “Beat the Press,” where he discusses the media’s coverage of economic issues.
