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Grandest Bargain Ever, a different wrinkle from Economist Richard Wolff

Jay's picture

My "Dismal Science" diet comes from a wide variety of sources. As our corrupt national political establishment and discredited media organs begin to focus on post-election Catfood Commission politics, it's instructive to see how different economists read the writing on the wall, and come to a variety of conclusions. In this case I'd like to highlight the observations of Dr. Richard D. Wolff, who appears to come to a similar conclusion to the one I derived in my previous post about how the Grand Bargain is a shell game calculated to drain the public funds for private purposes (The Grandest Bargain Ever, Explained).

Dr. Wolff has a weekly radio show called Economic Update on WBAI, which is available by podcast, and which I highly recommend as a sensible antidote to conventional media offerings that discuss economics and the markets. Dr. Wolff has kindly allowed me to post a partial transcript from last Saturday's show. In it, his emphasis appears to be a refutation of the argument that government is useless, and the hypocrisy of those who would use that argument while taking Trillions of dollars in government subsidies, tax deductions, no-interest loans, and toxic asset purchase agreements. But behind that is the identification of using the government as a financial transfer mechanism from citizens to corporate interests.

Without further ado, from Saturday's show.

One of the other topics covered by Romney and Obama and many many other candidates, is a conversation about the a role of government in the economy. and to hear these candidates speak you might get the following idea: that the government is some big, inefficient, clumsy institution that is constantly getting in the way of the benefits we would all derive if we just let private enterprise, free enterprise, do its thing--produce goods, invent goods, hire people, distribute goods--Boy, would we be better off if we really got the government out of things. The government should take less of our money, if we're companies, The government should take less of our money if we're citizens. We don't want to pay taxes, and it doesn't really go to a good thing because again, the government is a big, clumsy ox that we barely need, and that we would be better off without. And they compete with one another to tell this story.

But that's what it is: A story. And it's not true. And it's never been true. And it's important to understand that before we make enormous mistakes not only in terms of who we support in these electoral races, but what we support their doing, once whoever wins the race and gets in. Let me explain.

in 2008 the American economy collapsed. I don't use that word lightly. In the final four months, September, October, November, December, of 2008, the American economy looked like it could grind to a halt. I don't just mean that banks would have a problem, I mean the buses and subways wouldn't run, and the telephone might not work, and your job doors would be closed, and the store would be empty: the breakdown of an economy. That's certainly what most of the leaders of American free enterprise thought. The Lehman Brothers bank collapsed. One of the oldest and biggest investment banks in America. Bear Stearns, one of the biggest stock market and capitalist financial enterprises collapsed, things were looking extremely grim. The largest insurance company in the world, AIG, collapsed, and so forth.

What was done by the big businesses, when the economy, that they dominate, that they profit the most from, and as I just told you, the biggest businesses employ more than half the people, what did they do? And the answer is unambiguous. Crystal clear. They rushed to the government to save them. They weren't taken there by radicals. They weren't led by socialists or anything like that. The big businesses went to the government because they understood in 2008, and it went on into 2009, and even into 2010. And it still continues. That the government is what they need to help them. And the government did. Oh boy did it.

It spent, ready? Trillions, with a T, to bail them out. The treasury spent trillions, and many more trillions were provided by the federal reserve, in the form of investments: loans, purchases of bad loans, that the banks had made, which were taken over by the government, and replaced them with fresh, new money. A much more valuable resource for the bank than the bad loans that they had made. So the government was called in. And we said that was necessary as a nation. Bush the Republican. Obama the Democrat. Government saved the system. And we needed the government and we celebrated the government. Fast forward three years later.

It's now 2012. And what do we hear? We hear about the government being--as I told you--a big, clumsy inefficient blah blah blah, that shouldn't be taking our taxes. Suddenly we hear about the government deficit, the government has borrowed a lot of money, and that's gonna have to be paid back, and that costs interest, and we must do something about that, so we must cut government services to free up the money to reduce the deficits and the debt. Well now let's review. Why is the government borrowing so much money, particularly over the last three or four years? Why has the national debt gone up so quickly, again, particularly over the past three or four years? The answer is: the government bailout of private enterprises, especially financial enterprises. The government borrowed a fortune for those stimulus bills, the government borrowed the money, from the banks, which it used to bail out the banks. Wow. Nobody worried about the deficits and national debt in 2008 when the government shelled out hundreds of billions into the trillions. Then, it was important for the government to perform the role our business community wants. Which is to save them, when they make a mess.

Now that that has been taken care of, that at least the mess is not as bad now as it was then, now we're supposed to be thinking about the government in a completely different way. Not as savior, pouring money, to meet our needs, but no no no, the opposite: the government is bad, the government should be shrunken, we should pay less in taxes, we should deal with the debts of the government. Suddenly the government is bad. Three years ago it was the savior.

Be careful here. We're being hustled.

Here's the problem: When the government bailed out the banking system here's what was the difficulty. The banks weren't lending to anybody anymore because they didn't trust anybody. They didn't lend to each other. They didn't trust each other. They had made such bad loans that any bank was at risk any minute of collapsing. So no Bank A wanted to loan to Bank B for fear that Bank B would declare bankruptcy tomorrow morning, and never pay Bank A back. The credit system, as we say, was frozen. So the federal reserve came in and the government came in to unfreeze credit, by guaranteeing everybody's loans, by pouring money into the banks, to make them "whole" again. And here's what we did. We gave them fresh, new money. They gave the Treasury and the Reserve, in return, the bad loans that they had made, that they were stuck with. The government took over those toxic assets, and gave them money. And in doing that, these banks began to say, okay, now we have fresh good money, what do we do? Do we lend it to businesses? No, because the economy is in terrible shape. Do we lend it to people? No, because they can't pay back what they already owe us. So what the banks did was they took the fresh money given to them by the federal reserve, and lent it to the United States Treasury. And as the Treasury borrowed more and more, to bail out an economy that wasn't working--including bailing out the banks!--it developed debts, and the banks who lend to the government became nervous about the debts: Would they ever collect them? Would the United States government ever pay back the banks who had lent to the government, the money that the money that the Treasury and the Federal Reserve had given to them in the first place? This kind of card game was threatening, so the big banks want the government to shrink.

They want the taxes to be be reduced. They want money to be available to pay back the debts. The government is now bad and to be shrunken. Before it was great and there to save.

Don't be fooled. This is a game. The government has always been necessary in our society. The government has always played crucial roles. And the government has always saved capitalism from the capitalists, too. And when you hear the discussion about the government being a burden, that's just a game to get you to go along with cutting somebody's taxes--usually not yours--to play it out until the government is bad. And it's hard to keep it straight, since just a few years ago, government spending on this crisis we're in, was something every leading banker supported.

Punchline: Don't fall for this silly conversation about more and less government. The government has always been there. It does more or less depending on the needs of the economy, and the political forces that either gets those needs met or prevent it. When the business community and the banks were in trouble they used their power to get the government to bail them out. When the masses of people are in trouble because we have a crisis that's lasting five years, we don't have the organized political forces to make the government take care of us. Otherwise there would be a federal jobs program. Otherwise there would be more medical support, better wages. We have the things that were done by the Roosevelt government, under worker pressure, in the 1930s. That's the issue. Abstract debates about the role of the government are irrelevant.

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Alexa's picture
Submitted by Alexa on

proposals amount to a "stimulus package" on the back of seniors (particularly Boomers--with drastic cuts to Social Security and Medicare) and the poor and disabled (draconian cuts to the above programs AND Medicaid). And, of course, the ACA is the final blow to Medicaid (ie., privatization through managed care).

Thanks for your work explaining and writing about the Grand Bargain. With less than two weeks left until election day, we must disseminate as much info about this topic, as possible.


Submitted by chadwick newsome on

Many moderately informed people of my acquaintance are deeply convinced that Social Security must be cut in order to save the Republic. Because deficit.

I think the Big Lie has already had its desired effect and that there will be no political price to be paid for the destruction of SS and the cutting back of Medicare and Medicaid.
God knows that corporate media will not tell people they are being robbed. And neither will anyone else (except, as Jane Hamsher puts it, a few blogs that nobody reads.)

Alexa's picture
Submitted by Alexa on

Bear in mind, how draconian these cuts will be.

The PtB were cleaver in their attempt to hide this from "younger folks."

Remember how 'out of the blue' they stopped sending out annual Social Security statements. It will shield them from the wrath of younger voters, perhaps.

But Boomers like myself who are slated to continue receiving their statements every year, will notice the "steep drop off" in benefits. This is especially true because the cuts will go into effect very shortly. I personally don't know anyone near retirement age who doesn't keep their annual statements for comparison.

At the present, RL is keeping me from posting, but I assure you that to the best of my ability, I will do my part to get the word out. And I certainly have no intention of stopping when the election is over.

The next 6-8 months are very important. Hopefully everyone will stay engaged during this most critical period.

Here's a link to my "Quick Hit" just posted. President Obama announced his intentions the very next day after the final debate. We can't afford to give up now.

twig's picture
Submitted by twig on

and this is not meant to be offensive to younger people at all. But it's very hard for someone who is not older and had doors slammed in his/her face just for being older, to understand how important Soc Sec/Medicare are.

I completely get why a young person would think that cuts to these programs are irrelevant to them or no big deal. When you're a kid, you're immortal, you'll never get really sick, and you'll certainly never get old. And, again, that's not a criticism -- it's just how a lot of people think. I did, all my friends did, and here we are -- looking at our pitiful savings and wondering how we're going to stretch that another 20 years (fingers crossed) after Soc Sec is gutted.

So what I'm trying to say is the politicians are taking advantage of the fact that young people are just not aware of how badly they'll need these programs one day. I have the feeling I didn't say that correctly, but the internet is on and off today from winds, so I'm trying to do this quickly.