Published on
The Guardian/UK

Further Fiscal Folly

Before we take deficit hawks' advice on slashing social security, they should explain how they missed the $8tn housing bubble

The people insisting on cuts to social security and Medicare have revved themselves up and are now in high gear. They see their final victory on the horizon, with the possibility of a bipartisan deal involving substantial cuts to both programmes. They argue that the large deficits facing the country make it imperative that we address the long-term budget problem – meaning, the cost of these programmes – immediately.

Before anyone prepares to surrender, it is worth remembering, once again, how we got into the current situation. Before the downturn, the budget deficits were relatively modest. Even with the cost of fighting two wars, the Bush tax cuts and a poorly designed Medicare drug benefit the deficit was just over 1% of GDP in 2007, the last year before the downturn. This was arguably bigger than desired, but a deficit of this size certainly posed no imminent danger to the economy.


Then, the economy ran off the track. The reason was the collapse of an $8tn housing bubble. This bubble was easy to see for people who knew basic economics and third-grade arithmetic. It was also easy to see that the collapse of this bubble would derail the economy and lead to serious downturn. That is why some of us were warning about the bubble as early as 2002.

But where were the current group of anti-deficit crusaders back in 2002-2006, when it might still have been possible to do something to stem the growth of the housing bubble before it reached such dangerous levels? Well, they were crusading against the budget deficit, of course.

Peter Peterson, the Wall Street investment banker who is the patron saint and financier of much of the deficit crusade, was paying for the "Fiscal Wake-Up Tour", which was supposed to alert people to the dangers of the country's budget deficit. This travelling roadshow of policy wonks and economists had nothing to say about the growing housing bubble that was about to explode and sink the economy.

Then, we have the Washington Post, which is continually setting new records for imbalance on this issue, for example, by running six different columns by deficit hawks on the same day. As the bubble grew to ever more dangerous levels, the Post had no room for those warning of the risks it posed. In fact, its main source for information on the housing market was David Lereah, the chief economist of the National Association of Realtors and the author of the book, Why the Housing Boom Will Not Bust and How You Can Profit From It.

The same story can be told about National Public Radio, the major news networks and all the politicians now leading the charge to cut social security and Medicare. When the country actually did face a real economic disaster, these people were nowhere in sight. They were diverting attention to other issues and dismissing those of us who tried to warn of the real danger.

Now that we are experiencing an economic disaster – 25 million people unemployed or underemployed, millions of people facing the loss of their homes, more than 10 million underwater with their mortgages – as a direct result of their incompetence, these same people are telling us again about the urgent need to cut social security and Medicare. The deficit hawks somehow think that their case is more compelling because of the damage done by their incompetence.

It should not work this way. In most lines of work, incompetence is not a credential; it should not be one in designing economic policy either. Anyone who cares to tell us about the urgent need to deal with the deficit should first be expected to tell us how they managed to overlook the growth of an $8tn housing bubble. They should also be expected to tell us why they have a better understanding of the economy now than they did before the collapse of the housing bubble.

Social security and Medicare provide essential supports to tens of millions of retirees and disabled workers. The projections are clear. The financing of social security poses no major problem – it is projected to be fully solvent for almost 30 years with no changes whatsoever. Medicare poses a problem only because the private healthcare system is broken.

Honest people talk about the need to fix the healthcare system. Less honest people scream about the need to reform "entitlements". And they think that the public somehow should listen to them because of their record of incompetence.

This is the world we live in. This is the world we cover.

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