Upside-down priorities

THE U.S. economy continues to stagger. Unemployment is at its highest levels since 1983. States from California to New York are slashing services, jobs and wages. Foreclosures will hit 3.2 million households this year, up from 3.1 million in 2008. And just 68 percent of the country's industrial capacity is in use, the lowest since records were first kept in 1967.

The economy may not be in freefall as it was at the end of 2008, but it's still almost certainly contracting. Given this still dire situation, there are increasing calls for the Obama administration to propose another economic stimulus package.

But the Obama administration has a message for working people suffering through this crisis: Wait.

"I think all economists believe, and this was inherent in the design of the program, that the biggest thrust or force would start to take effect in the second half of this year," said Treasury Secretary Tim Geithner, explaining why the administration won't consider a second stimulus. "And we're going to start to see that happen. But I don't think that's a judgment we need to make now--can't really make it now prudently, responsibly."

Translation: Workers facing hard times have to take a back seat to the holders of government bonds, who are worried about the fast-growing federal budget deficit.

Even Barack Obama's corporate-friendly health care reform proposals have been recast as a cost-cutting measure. "We used to say we wanted to achieve two things: universal coverage and fiscal discipline," an unnamed senior administration official said to a reporter. "Now we say we want fiscal discipline and universal coverage."

Of course, the "fiscally disciplined" Democrats and Republicans didn't worry about any of this when they backed George W. Bush's tax cuts that added $1.35 trillion to the deficit.

FAR FROM being too big, Obama's $787 billion stimulus plan was badly underpowered compared to the scale of the crisis. It was tilted disproportionately to tax cuts, which have less immediate impact on the economy than, say, infrastructure spending, which creates jobs.

Even the tens of billions of dollars that the government plowed into the auto manufacturers won't save or create jobs. Rather, General Motors and Chrysler had to agree to eliminate tens of thousands of jobs in order to qualify for the bailouts.

And the stimulus package pales besides the overall amount the U.S. government has spent or guaranteed for the American financial system--an estimated $13 trillion, almost as great as the entire annual economic output of the country. And that money materialized in just a few months.

And now, that government money is showing up in the bottom lines of the big banks. Thanks to your dollars--and a helpful accounting rule change to help hide their losses--the biggest banks have reported huge jumps in earnings.

As the Wall Street Journal noted, "The bonanza could be fresh ammunition to critics who say taxpayers are subsidizing runaway earnings--and bonuses that are on track to rebound sharply this year--at financial firms that are at least partly to blame for the financial crisis and recession."

But when the state of California requested federal aid in June to cover a huge budget deficit, federal money wasn't available. State officials found themselves on the receiving end in a replay of 1975, when Republican President Gerald Ford told the bankrupt city of New York to "drop dead," as a tabloid newspaper headline put it.

Obama wasn't as blunt as Ford, but the result is the same: because emergency federal loans were ruled out, draconian budget cuts will hit the most vulnerable people hardest.

The priorities of the Obama administration can be seen by anyone who bothers to look. Poor kids and homebound elderly Californians will lose their health care, while Goldman Sachs executives will take home bonus packages almost as fat as those of the peak years of the financial boom.

ALL THIS was foreseeable. Economist and New York Times columnist Paul Krugman has been arguing since last year that a key element of any stimulus should be aid to the states. "Senate 'centrists'...partially eviscerated the original stimulus plan by demanding cuts in aid to state and local governments," Krugman wrote in a July 1 column in which he called for a second stimulus package.

Writing in Slate.com, journalist Christopher Beam explained why federal aid to states is so beneficial:

Another relatively speedy way to jump-start the economy would be to give more money directly to state and local governments. That money gets spent a lot faster since the programs it goes to--food stamps, for instance, or unemployment insurance--already exist. Construction projects, by contrast, take a while to plan. That's why less than 5 percent of the money allocated to the Department of Transportation has so far been spent.

With the economy continuing to decline, University of California-Berkeley economist Brad DeLong recently wrote that the initial stimulus was half the size it needed to be. "If we had known then what we know now," he wrote, "it would have been prudent then to propose twice as large a fiscal stimulus program as the Obama administration, in fact, did propose."

The Financial Times, certainly no bastion of economic radicalism, published an editorial July 10 calling on Obama to spend hundreds of millions to aid states as part of a second stimulus program:

The ideal second stimulus would be very simple; A promise to write checks for a few hundred billion dollars over, say, two years to the U.S. state treasuries on the condition that the money was spent immediately. That way, these major fonts of demand would not be forced to cut back in response to their slumping local tax revenues...

The stimulus-averse politicians who remain opposed to such basic counter-cyclical measures should realize that the alternative is the primeval economic catharsis of a deep depression.

Whether or not a second stimulus materializes, the Washington-Wall Street crowd will continue to protect the status quo--even though the hope of a recovery based on rising consumer demand is no longer possible given huge debt and rising unemployment.

"All we know is the current economy can't 'recover' because it can't go back to where it was before the crash," wrote former Labor Secretary Robert Reich. "So instead of asking when the recovery will start, we should be asking when and how the new economy will begin."

Reich is correct. What's needed is a new economic program that transfers wealth from the rich to fund health care and urgently needed social programs.

The first priority is a Medicare-for-all national health insurance system, rather than the monstrosity being created in Congress by corporate lobbyists. Next, the government should spend to create jobs in order to reduce unemployment and boost workers' buying power.

Rather than hand over trillions of tax dollars to the banks, the government could use that money to directly refinance the mortgages of the millions who owe more money for their homes than their houses are worth. And the manufacturing base of the country, rather than sold off for scrap during corporate downsizings, should be converted to produce mass transit systems, solar panels and "green" industries.

Any such effort, of course, will be denounced as "socialist" by the Republican right--despite the fact that big government programs were central to the New Deal that ameliorated the terrible conditions of the Great Depression of the 1930s.

But with Obama's economic policy firmly in the grip of Wall Street, it's going to require organizing, struggle and protest to compel such a change in direction. That's what happened in the Depression, when a revitalized labor movement burst onto the scene to challenge capital's agenda. In today's Great Recession, that kind of movement is needed once again.