Bill Moyers
December 14, 2012
Bruce Bartlett and Yves Smith on Overhyping the Fiscal Cliff

BILL MOYERS: Welcome. Lately I’ve had Phaedra on my mind. Not the Greek myth of the tragic daughter of that name, but the retelling of the story in a 1962 movie starring Tony Perkins and Melina Mercouri. Their illicit affair over, Perkins crashes his cherished roadster over a cliff. A big sendoff accompanied by none other than Johann Sebastian Bach.

TONY PERKINS in Phaedra: Oh John Sebastian! You’re playing your music like crazy and I’m listening to it in Greece! What are you doing here? Oh John! Why aren’t you home minding the children? I at least had some business in Greece! I had a father that killed every Phaedra! Phaedra! Phaedra!

BILL MOYERS: That scene actually keeps coming to mind as I try to follow the melodrama in Washington that has us heading for a cliff. A fiscal cliff. But are we? Or is this, another myth in the making? For some insight, we turn to two seasoned observers both of whose books you’ll want to as Santa to leave in your stocking.

Bruce Bartlett was an economic adviser to the supply-side icon Jack Kemp, and to two presidents-- Ronald Reagan and the first George Bush. He got into hot water with his conservative cohorts when he wrote a widely quoted book critical of the second President Bush. His most recent work is The Benefit and the Burden: Tax Reform-Why We Need It and What It Will Take.

Yves Smith is the founder and editor of the popular blog Naked Capitalism. After 25 years in the financial services industry, she now heads the management consulting firm Aurora Advisors. She’s the author of this book: ECONned: How Unenlightened Self Interest Undermined Democracy and Corrupted Capitalism.

Welcome to you both.

YVES SMITH: Thank you.

BRUCE BARTLETT: Thank you.

BILL MOYERS: Is the fiscal cliff just a metaphor? Or is it for real?

YVES SMITH: Well, the cliff is an inappropriate metaphor. And it does conjure up images, precisely the one you said, of cars or people or companies falling over and landing in a great mess at the bottom. In fact, it would be much more accurately described as a fiscal slope. There are certain changes that will occur on January 1st if no budget deal is arrived at. But they're very gradual in their impact. And in fact, many of them could be reversed. For example, if, you know, payroll tax increases would take place. But if a deal were arrived at on February 15 or March 3rd, you could even put the rates, the old rates in back retroactively and have everybody get a credit. So the notion that we have to have a deal by December 31 or there'll be a disaster is really overstated.

BRUCE BARTLETT: I would liken the fiscal cliff to the Y2K problem, remember? At the end of 1999, there were many people who were worried that all the computers would cease working and the planes would fall out of the sky. And, of course, none of that happened. But, of course, one of the reasons it didn't happen is because everybody prepared for it ahead of time. And that's essentially what's happening right now. I think the important thing to remember is that there's no possible way of a deal before the last possible minute. And one reason for this, is that John Boehner is, the speaker of the House, is in a very precarious position regarding his own membership.

And it's article of faith among Republicans that any deal that is arrived at too soon is to their disadvantage, because they could have always gotten a better deal if they'd simply held out and hung tough longer. And so Boehner is in a position where even if he knew exactly what the deal would be today, he cannot deliver on it until, you know, 11:59 on December 31, or else his own members will attack him for having given away the store.

BILL MOYERS: This is the second year in a row we've had this crisis over budget, deficits, taxes, spending cuts. Is this any way to run a democracy? Two years in a row?

BRUCE BARTLETT: Well the worst part of it is that the real fiscal cliff is something called the debt limit which was the key part of the problem in 2011 that actually tanked the markets. And Republicans understand they're going to have to give on taxes and give on the budget. But they still think that the debt limit is something they can use to ransom their true agenda of slashing benefits for the poor and slashing taxes for the rich.

YVES SMITH: This is one place where I differ with Bruce. I actually don't think the deficit is the problem that it's being portrayed to be. And there are sort of two levels of--

BILL MOYERS: You mean the long-term deficit.

YVES SMITH: The long-term deficit. I mean, there are two, you know, there's, one is the immediate issue that cutting budget, reducing government spending when the economy is weak actually makes the situation worse. They've been running this experiment in Europe where they've implemented austerity in a number of countries with the idea that we're going to reduce government spending in order to reduce deficits, because we want to get the ratio of debt to G.D.P. to the size of the economy down. But what happens when they've done that is even though they may have shrunken the numerical value of the debt, the economy has contracted so much more that the debt to G.D.P. ratios get worse. It actually makes the problem worse. So, austerity is bad medicine now.

BILL MOYERS: I just read the other day that this campaign “Fix the Debt” raised $60 million and hired and it recruited 80 corporate CEOs to go to Washington and lobby for fixing the debt. What do they want?

BRUCE BARTLETT: I think reason why the corporate executives are so big on fixing the debt is because they know that if they don't-- when they have some control over the political system through their political action committees and Republican control of Congress, they can't cut entitlements now. When they do eventually become a problem that will require some immediate action, they know that it will involve higher revenues. And the higher revenues are going to be on them. If you check any poll, you find overwhelming support for raising taxes on people making more than $250,000 and raising taxes on corporations. And so I think they're trying to fend that off.

BILL MOYERS: Obama campaigned on higher rates. And he won. Why can't Republicans come to terms with that that's how the election came out?

YVES SMITH: The Republicans have become very dedicated to the idea that taxes in any form are bad. That when, in fact, there are times when taxes can fund productive investments and actually, again, lead to more economic growth. But it's the Republicans and ironically, Wall Street, have basically adopted the same strategy of being non-negotiable. That if they have a blocking position, and they feel that they have a blocking position by virtue of their majority in the House, that they're going to take advantage of it. So regardless of what the election said, if they can stymie a deal to their own advantage, they will.

BILL MOYERS: Given what both of you are saying, why are we talking about reducing the deficit instead of creating jobs? Because when people have jobs, they spend money. When they spend money, businesses have customers. When they have customers, the money keeps circulating. And yet Washington isn't talking about jobs.

BRUCE BARTLETT: And I think one reason for this is the decline of labor unions. It used to be that when the union movement was much bigger and more powerful, and especially when private sector workers dominated the union movement, the AFL-CIO sort of looked out for the working class. They looked out for all workers, not just union workers. They understood that a healthy working class having lots of jobs was ultimately to the benefit of their members. And I think the decline in power of the unions and now and the fact that public sector unions now dominate the AFL-CIO is a key reason for that. The other thing is kind of a dirty secret, which you may not agree with is that fundamentally Barack Obama's pretty conservative. He really is. He's an Eisenhower conservative. He's not a liberal. I mean, he's-- and I think that's one of the problems with the Democratic Party is they're looking for leadership to a guy on an issue like why aren't we creating jobs? Why isn't there more aggregate demand in the economy? And it's because their guy doesn't really want it.

YVES SMITH: I agree 100 percent. I mean, Obama has been-- I'm always shocked when people call Obama a socialist, because he's in fact, I think you might be doing a disservice to Eisenhower. And even, you know, Nixon is to the left of Obama on many, on most social issues. I mean, Nixon proposed a negative income tax, which everybody forgets about. And the other point is that this is reflected broadly in the Democratic Party, at least in the sort of elite level of Democratic Party. I mean, you know, I've seen people like, for example, Gene Sperling speak at conferences.

BILL MOYERS: Former Clinton economic advisor.

BRUCE BARTLETT: Right, he's now Obama advisor.

BILL MOYERS: Now Obama--

YVES SMITH: And he for example, he talked about middleclass jobs. And you could tell the way he used the expression middleclass, these are, like, people he didn't know personally. I mean, there's this weird-- you've got this big class stratification, where the people in D.C. don't see this, right?

YVES SMITH: What's even worse is we now have a close-- in the Democratic Party it's explicit and my understanding is in the Republican Party it's pretty close to explicit, pay to play systems. Where it used to be that the assignments on the prestigious committees were based on seniority. Now in the Democratic Party, they have a price tag that if you want to be on the head of an important committee, you literally have to kick in a certain amount to the D triple C.

BILL MOYERS: The Democratic Congressional Campaign Committee

YVES SMITH: Right. And then the committee controls more goodies that are perceived to be essential to congressmen. For example, they do the studies. They help buy the messaging. They'll do the policy research. And they provide a lot of support to the congressmen beyond what the congressmen get for their staffers. So you know, it's not just that you need their money at election time. They give you a lot of support on an ongoing basis. And you don't want to alienate them, because you want not just the money, you want all the other support that they provide. So they've created this party, this very tight system where the party exercises more control over the members than they used to.

BRUCE BARTLETT: But there's another important part of this that we saw the other week when Senator Jim DeMint announced that he was becoming head of the Heritage Foundation. And what you're seeing now is the permanent campaign. I mean, it used to be these political action committees would come into existence and essentially go out of business the day after the election. But Karl Rove's operation is still out there running advertising.

CROSSROADS GPS ADVERTISEMENT: The time for politics has ended. We need bipartisan ideas we can all support. Call President Obama and tell him, “It’s time to show us a balanced plan.” Because every day wasted is another $4 billion we’re deeper in debt. And the Heritage Foundation, which once was a think tank of analysts writing papers has now morphed into another organization called Heritage Action, which raises tens of thousands of, I'm sorry, millions of dollars to run campaign commercials and do that sort of political action, which reinforces the problem of money is so, vast amounts of money are sloshing around in the system. And the members of Congress are almost like, you know, flotsam floating on a sea of money. They're just bouncing around.

BILL MOYERS: So, what do you both think the public needs to know about this economic debate going on right now? Cut through all of that.

YVES SMITH: That what they're being told is necessary and good for them is, in most cases, 180 degrees opposite of what needs to happen. We need as you suggested, we need more spending to promote jobs. We've got plenty of targets. We've got crumbling infrastructure. It--

BRUCE BARTLETT: This city alone, where we're sitting, New York City, needs $50 billion to repair from the hurricane.

YVES SMITH: Once you get it rolling, there is plenty of stuff to do. So the notion that we don't have things that need to be done that could employ lots of people from very low-skilled people to more middle and high-skilled people, that's just a myth.

BRUCE BARTLETT: There was a poll just the other day that you probably saw. Something like half of all Republicans believe that the 2012 election was stolen for Obama by a group called ACORN, which was-- which went out of business several years ago. It doesn't even exist. I mean, they just believe these conspiracy theories. And they circulate without barrier, because nobody will say anything to disagree with it. And if you hear the same propaganda over and over and over again, eventually you're going to start to believe it.

YVES SMITH: There's this tremendous amount of brainwashing that goes on. And I don't understand how it happens. People convince themselves, you can understand it more in the public companies, because these guys have to get up and tell things to shareholders. And if you say the same-- they've done studies of, like, defense lawyers. If you say, even if you know the client is guilty, but you have to defend him, because that's your job. They start believing their client's innocent, if they have to defend it. And similarly CEOs have to, for public reasons, you know, sell a certain story. And they've started to-- and they honestly believe Washington is the problem, as opposed to they're a big part of the problem, if not the problem. Back to our earlier discussion about capitalism.

BRUCE BARTLETT: But they'll never admit what the true Washington problem is. So for example, Republicans and conservative economists are absolutely convinced that the only thing that matters for the economy is tax rates. Customers don't matter, sales don't matter, none of that matters at all.

BILL MOYERS: Just this week a conservative columnist writing in “The Washington Post,” Marc Thiessen, you may know him, said Republicans in this fiscal showdown should stand and fight. He told the story from the Korean War when American marines were encircled by communist forces and the commander of the marines Colonel "Chesty" Puller reportedly declared, "We're surrounded. Good, now we can fire in all directions." And Thiessen says this is where the Republicans are. They can surrender or stand and fight, which means standing their ground on taxes, putting a plan forward to reform the tax code, passing those plans in the house, and putting Obama on the spot.

YVES SMITH: Well, This is where Obama wants to go. He just needs the Republicans to make noise so he can go where he wants to go.

BILL MOYERS: Which is where?

YVES SMITH: Obama wants to cut entitlements. He said this in a famous dinner with George Will. I think it was even before he was inaugurated. He went and had dinner with a group--

BRUCE BARTLETT: That's right, a group of conservatives.

YVES SMITH: He met a group of conservatives. And he made it very clear at this dinner that as soon as the economy was stabilized that he wanted to cut Social Security, well "reform." But that's just code for "cut" Social Security and Medicare. Obama really believes that this will be a signature accomplishment of his. That he will go down in history positively for.

BRUCE BARTLETT: That's right. If you go back to 2011 and look at the deal Obama put on the table, he was willing to make vast, vast cuts in entitlement programs. And the Republicans walked away from it, which only goes to prove that they don't have the courage of their own convictions. But Yves point is exactly correct. Obama really is maybe to the right of Dwight Eisenhower and fiscally. And it's really at the root of so many of our economy's problems, because he didn't ask for a big enough stimulus. Has let the housing sector, basically, fester for four years without doing anything about it. He's really, you know, focused more on cutting the deficit than people imagine.

BILL MOYERS: But you will hear it said by some Democratically-inclined columnists like Jonathan Chait who writes that "Democrats should throw a bone to the right by raising the Medicare age." He actually wrote that this week. "Medicare has symbolic value. And raising the age qualification would send the message that Democrats take this fiscal crisis seriously."

YVES SMITH: All that results in is more old people getting sick, winding up with more costly care. It's one of these sort of penny wise and pound foolish measures. You know, again, the big problem with Medicare is that we have a health care cost problem in this country. And the health cost problem, whether they're in the Medicare system or whether they're out of the Medicare system. I mean, we have our health care costs are twice per capita-- more than twice what most countries are in the advanced world. And we have generally speaking worse outcomes. So if we would fix health care, we would fix this problem. But there's just no will to fix health care, particularly after Obama did a big health care reform and it didn't fix the problem.

BRUCE BARTLETT: I don't really understand why this raising the Medicare age has become a big issue. It saves very little money in the short run. You have to go out decades and decades before it accumulates to very much money. I think it saves maybe $100 billion over ten years, which is really a drop in the bucket, if you're really trying to reduce deficits. So it's the fact that Obama's willing to talk about this, I think, would give me a lot of concerns if I was someone on the left.

BILL MOYERS: If capitalism is so great, why is it doing so poorly in this country for ordinary people and our public values?

YVES SMITH: When I was a kid on Wall Street, there was a sense of propriety. There was a sense that there was more of a sense noblesse oblige among the elites. There was a sense even on Wall Street that you didn't take too much. That you, that, you know, the golden philosophy of long-term greedy was actually, I think, broadly shared in the industry. That you only took a little extra when your client was making money, too. And now over time we've had these values set in, where people increasingly see themselves as kind of isolated. They see their success as individual, even though you grew up in a society, you got educated, you know? People didn't, you know, spring like now that, since we're using these mythological metaphors, like Athena from Zeus's head. People didn't sort of pop into the world with no social benefits. But there's this tendency to see that to see success as your own personal success when, yes, you may have worked hard to get there. But there are a lot of people who worked hard who didn't end up with all the cash and prizes.

BRUCE BARTLETT: I think there's two reasons. One is an unjustly obscure economist named Michael Jensen wrote some very important papers in the '80s explaining, basically, that the only responsibility that a corporate executive had was to maximize profits. That anything else, any responsibility to the workers, any responsibility to the communities was nothing. The way he helped the nation, the way he helped everybody in a sort of Adam Smithian view was to just relentlessly raise corporate profits. And then secondly, unfortunately, I think Bill Clinton had something to do with this. Remember, in the 1993 budget deal, he had a provision that capped the deduction for corporate executive pay at a million dollars. So what happened is this created new methods of corporate, of compensation that involved stock options. Because incentive-based pay was not covered by the provision.

So all of a sudden these guys who used to pay themselves a couple million dollars a year, they're paying themselves gazillions of stock options. And all of a sudden, the Jensen theory of maximizing corporate profits meant that it went directly to their bottom line, you see? And then they started, then you have the, Yves probably knows more about this than I do, these compensation committees that the corporate executives hire to design their compensation. And they all tell the boards, "Oh, you have to pay this guy 500 times what the average worker's being paid or he might leave. And that we can't allow that possibility."

YVES SMITH: Oh, it's marvelous, yes. No company wants to have their CEO be in the top-- in the bottom 50 percent of whatever the consultant defines the relevant universe as. So you create this perpetually ratcheting system, right? Because the consultant will do the study that somehow finds that their CEO's in the bottom half. So his pay gets moved up, which moves the average up. And bumps somebody else into the bottom half. And then oh my God, his pay has to be moved up. So independent of corporate profits increasing, just the mechanism of the way they do these studies, keeps everybody leapfrogging--

BRUCE BARTLETT: Of course, we've had a problem with the corporate boards that Berle and Means, you know, identified back in the 1930s. The boards don't look out for the shareholders the way they're supposed to. In fact, they're simply in the pocket of senior executives. And they just rubberstamp whatever they want and whatever is in their own personal best interest, everybody else be damned.

BILL MOYERS: So let me close with, where would each of you compromise, if you were called upon to break this deadlock?

YVES SMITH: I'm not sure that compromise is worthwhile. If we go over the fiscal cliff or into the fiscal slope, we're going to have the tax increases kick in. If Obama were interested in negotiating for a better deal for the ordinary person, he should actually go into January. But the whole fact that he wants a deal now says that, says that he is as conservative as Bruce says he is.

BILL MOYERS: You mean we should go over?

YVES SMITH: We should go over.

BILL MOYERS: And see what happens?

YVES SMITH: We should go over just because then we've already had tax increases put in. Republicans don't have the leverage of, you know, "Oh, these--" you know, of doing a deal without the tax increases already having taken place. You're in a very different negotiating position. Going past January 1 would actually be a very good outcome for ordinary Americans.

BRUCE BARTLETT: I'd go even further. I'd say let the fiscal cliff take effect permanently. Now everybody's afraid to do that. They think the economy's too fragile. But if you look at what the Congressional Budget Office has estimated. They say, "Yes, we'd lose some growth for about half a year. But the medium and long term growth would actually be higher, because it would actually do exactly what everybody says they want to do, which is cut a lot out of the long-term deficits. And it would do so fairly by raising revenues a lot and cutting spending." What, how else are we going to cut the defense budget if we don't allow the sequester to take effect? Both parties are pretty much into that. So I say let's just let the whole thing happen. If I was a member of the Senate, I'd filibuster anything to get rid of it.

BILL MOYERS: Bruce Bartlett, Yves Smith, I'll see you on the cliff. Thank you very much.

YVES SMITH: Thank you.

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