It's the Politics, Stupid

The mainstream media infrequently acknowledges that the various economic and financial "crises" around the world relate to political choices rather than unstoppable economic forces of nature (category error intended) that no one can control.

No where is this more true than in the furore over the US debt ceiling. What has been presented as "partisan bickering" over an absolutely necessary reckoning with out-of-control debt and deficits was in reality a cynical act of blackmail by the Republican Party, which took advantage of what had always been a routine legislative process to advance their agendas (mainly cutting government programmes for the poor and middle class and ensuring rich people don't pay any more taxes). Obama has aided and abetted this by consistently acting as if the deficit is the biggest problem, while meanwhile, millions of people are unemployed.

The depiction of the United States as an economic basket case propped up by China is muddled and mostly wrong. There's a good piece pulling apart all the misinformation from Dean Baker and David Rosnick at the Centre for Economic and Policy Research: 7 Things You Need to Know About the National Debt, Deficits and the Dollar (see the press release for a potted version).

The only areas where the US has genuine sustainability issues are in the long-term with health care costs -- a massive issue for both the public and private sector. However, the sabotage by the Republicans may make short-term instability a self-fulfilling prophecy. (And these are some of the same people who decried as "unpatriotic" those who argued against invading Iraq!).

The downgrading of US debt by Standard & Poors also has political aspects. At least this is getting widespread push back. Numerous people have pointed out the ridiculousness of taking Standard & Poors seriously about anything, let alone sovereign debt. More here and, amusingly, here. Even a Reuters-circulated piece mercilessly mocks S&P. Note that in New Zealand, the Government defended their most recent Budget by boasting that "Phil Goff might not like it, but Standard and Poor's does". Hmm.

Krugman and others tear out their hair at the narrative that recent stock market panics are the result of fears about public debt. If so, why did the interest rates for 10-year US Treasury bonds go down following the downgrade? A more plausible story is that the markets are reacting rationally to the ongoing stupidity: the demand for austerity will hurt the economy, which in turn will fuel calls for more austerity, and so forth.

Why are these perverse and self-defeating choices being made? As always, an interesting question to ask is: cui bono? Krugman (again) analyses the terms of the interests of rentiers:

[The] only real beneficiaries of Pain Caucus policies...are the rentiers: bankers and wealthy individuals with lots of bonds in their portfolios.

And that explains why creditor interests bulk so large in policy; not only is this the class that makes big campaign contributions, it’s the class that has personal access to policy makers — many of whom go to work for these people when they exit government through the revolving door. The process of influence doesn’t have to involve raw corruption (although that happens, too). All it requires is the tendency to assume that what’s good for the people you hang out with, the people who seem so impressive in meetings — hey, they’re rich, they’re smart, and they have great tailors — must be good for the economy as a whole.

But the reality is just the opposite: creditor-friendly policies are crippling the economy. This is a negative-sum game, in which the attempt to protect the rentiers from any losses is inflicting much larger losses on everyone else.

There's more here and here, and some interesting debate from The Economist website here.