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The end of the New Deal as we know it?

So it seems that Obama is willing to play ball with Republicans on the debt-ceiling issue.  Meaning cut Medicare and Social Security in exchange of an increase in the debt limit, increasing planned cuts for the next ten years from somewhere around two to closer to four trillion dollars.  This was reported by the Washington Post, and seems to be in accordance with, not just Obama’s politics, but of the mainstream democrats since Carter and including Clinton, who notoriously ended welfare as we knew it.

It’s incredible that Obama would cave without putting a fight (he says that the WaPo story is overhyped apparently, but suggests that Social Security should be a means tested program!).  This basically implies that the long fight that started with Reagan’s presidency to dismantle the basic achievements of the New Deal will finally succeed under a democratic presidency.  But, on the other hand, it is part of the democratic move to the right, at least on economic issues, since Carter.

The graph shows the rate of growth of median income since 1948.  The average rate of growth until 1979, before the Volcker shock, was 2.4 per cent.  Since the Reagan administration it has been 0.5 per cent.  That is the miracle of trickle down economics.  And it is because the economic performance is so poor that fiscal problems have taken place.  It is ironic that conservatives managed to sell the failure of their policies as the reason why those very same policies should be pursued.



    Stiglitz of course agrees with you!!

  2. Yep, but he is concerned that "In the US, this right-wing resurgence, whose adherents evidently seek to repeal the basic laws of math and economics, is threatening to force a default on the national debt." My concern is that this fabricated crisis will them to use the threat of default (which is non existent) to repeal the basic pillars of the New Deal.

  3. What I don't get is how just about everyone agrees that tax increases will have some negative effect on the fragile economy but somehow spending reductions will be neutral at worst and might even (magically)spur more activity. Multipliers aside they're essentially the same-reducing the spending power of the private sector. And the press--not to mention Democrats--totally concede this completely false point to Republicans!

  4. Matias,

    How do you explain that incomes have risen about as slowly or even more slowly in European countries that have maintained and even expanded the traditional social democrat welfare state?

  5. Wow, terrible comment Sven. First, nowhere did I say that the size of the welfare state (New Deal programs) explain the lack of income growth. It's the other way round, the lack of growth caused by the monetarist policies of your beloved Reagan and followers that allow crazy republicans (and dems that sold out) to try to eliminate the New Deal programs. And the graph shows a fact (not opinion) that income grows less after Reagan (so much for the myth about Reaganomics). Second, the welfare expanded in Europe? As Vito Tanzi and Ludger Schuknecht have shown in their book on public spending, public spending (including social spending) stopped growing with the conservative revolution, and spending on interest increased. Further, in his Growing Public, Peter Lindert shows that the Welfare State does not have a negative impact on growth (the opposite is true). You turned conservative, but I didn't know that you were anti-Keynesian now.

  6. Oh yes. Europe is way to monetarist, and has been for a generation, irrespective of political colors (Thatcher as much as Miterrand or Zapatero). The ECB and Maastricht is the problem for lack of growth.


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