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Even now, major economic policy leaders still don't get it.  What's worse is that they make it obvious.

The International Monetary Fund (IMF) just released it's second World Financial Outlook for the year.  Contradicting themselves, they say that the U.S. must immediately begin to reduce its debt, but the government must also compensate for flagging private demand through increased spending.

This sentence stands out in the Executive Summary in its assessment of the U.S. economic forecast:

"...activity in the United States, already softening, might suffer further blows— for example, from a political impasse over fiscal consolidation, a weak housing market, rapid increases in household saving rates, or deteriorating financial conditions."

The term "fiscal consolidation" refers to deficit and debt management, and in this context, the IMF is saying that the deficit and the debt is a major concern that must be addressed now.  However, the IMF acknowledges a few paragraphs earlier that "the handover from public to private demand in the U.S. economy stalled", i.e., that private demand has not risen to compensate for the end of the stimulus.  They also note that housing demand is low (in fact, new home starts are decreasing despite increases in the number of building permits issued).  Furthermore, they acknowledge that households are saving more, an activity that serves to offset and compensate for government debt.  But then they say this:

"Bold political commitment to put in place a medium-term debt reduction plan is imperative to avoid a sudden collapse of market confidence that could seriously disrupt global stability. At the same time, renewal of some of the temporary stimulus measures—within the medium-term fiscal envelope— and accommodative monetary policy can partly cushion private activity."

They want us to cut spending while increasing spending.  They also want us to reduce interest rates, which are already near zero and serve as a disincentive to productive lending but an incentive for unproductive gambling on derivatives, and buy back bonds.  While the IMF does not quite endorse a policy of austerity that would reduce private demand even further, and while saying that some "medium term" stimulus is needed, their continued emphasis on the debt sends exactly the wrong message at the wrong time.  They say that we must "reach political consensus on the design of debt reduction by this fall".

"The first priority for the U.S. authorities is to commit to a credible fiscal policy agenda that places public debt on a sustainable track over the medium term, while supporting the near-term recovery. For this, the fiscal consolidation plan should be based on realistic macroeconomic assumptions and should comprise entitlement reform and revenue-raising measures (for example, gradual removal of loopholes and deductions in the tax system and enhanced indirect taxes)."

Our first priority, then, is to the banks and not to the middle class and the poor.  They encourage us not only to cut spending from the budgets for essential entitlement programs but also to to reduce funding for them through decreased taxes (thus assuring that we are no longer entitled to them).  They also say that we should increase indirect taxes, which always fall more heavily on the middle and impoverished classes.  It's okay, then, if income inequality and poverty increase as long as we get the debt down.

That is the policy that Barack Obama, right-wing Democrats, and the Republican establishment want to impose on America.

This is one of the few areas in which private sector finances are similar to public financial policies: You can't pay back your debts if you don't have an income, and you can't generate income unless you invest something first.  Our debt is, indeed, a serious problem, but it's a long-term problem, and we have other priorities right now, such as a dramatic increase in poverty.  We must deal with the jobs crisis in the short term and compensate for a lack of private demand through public spending.  That will automatically take care of the longer-term debt problem.  As private incomes rise, private demand will increase, tax revenues will increase, and government can reduce compensatory spending while paying back the debt.

Unfortunately, while the IMF does acknowledge that government must compensate for decreased private demand now and address the debt in the medium term, the "debt challenge" is always the first thing that any economic leader ever talks about.  Worse yet, other major organizations and leaders think that the deficit and the debt are the only problems that we should deal with.  Europe is on the virge of toppling like dominoes because the European Central Bank (ECB) focuses primarily on keeping inflation down (when a little bit of inflation would actually be good right now) and emphasizes fiscal austerity.  They do this because inflation hurts the people with the most money the most, while everyone else might actually benefit from a little bit of inflation.  The result is that income normally received by the middle class and the poor is diverted to the rich.

The rich are still protecting the rich at the expense of everyone else.

As Paul Krugman points out, "we’re having the same crisis [we had in the 1930's], and making the same mistakes".  He calls it "doom".

-- David Dickinson

Originally posted to EveningStarNM on Wed Sep 21, 2011 at 06:56 AM PDT.

Also republished by ClassWarfare Newsletter: WallStreet VS Working Class Global Occupy movement and In Support of Labor and Unions.

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