Jon's Soapbox
Let's Close the Debate -- Deficit Reduction Should Not be The Near Term Focus
(posted 3/11/2013) - I know that folks can argue about long term federal deficit policy goals, but jeez, we went from deficit surpluses in the late 90's to deficit spending in all the budget years from 2001 through 2008 and the deficit scolds were largely silent! During that period accumulated federal debt went from 56% to more than 80% of GDP, and the economy was booming!
When the great banking financial system collapse occurred in time for the 2008 presidential election the Republican brand was tarnished beyond redemption in that election cycle. But a curious thing happened as soon as a Democratic president took office, the deficit scolds' appeared from every corner and began to chorus that we couldn't allow the debt to grow at even the same rate it had during the previous administration's two terms!
I'm sure you've seen a deficit hawk's graph showing 2009 through 2012 deficits as a percentage of 2009 - 2012 GDP, with an average of 8%; versus the Bush years' average of 4% as proof of O's profligacy; but come on, Bush had 7+ years of booming GDP growth, even as his government increased absolute debt to new highs -- unlike 2009 where GDP decreased by 6% compared to the previous year! Of couse the massive recession impacts (lower GDP, lower tax revenues, stimulus program, and increased safety net payments, eg. unemployment insurance payments and food-stamps) pushed the deficit percentages up significantly!
We heard from numerous publications and from all across the airwaves how a $1.4 trillion dollar annual deficit would bankrupt the US and cause both hyper-inflation, and soaring interest rates within the year (that was in 2009). Folks with no economics modelling knowledge, and no applicable expert status other than being rich, politically influential, or being media owners or pundits began sounding off as though it was obvious that this president and his administration were naive and foolish when it came to managing the largest sovereign nation's economical problems. Seems like odd timing, given the president inherited the biggest recession since the great depression of the 30's.
Please read Paul Krugman's take down, written in laymen's terms, of the folly of these doom-sayers, and the damage they continue to do to our political and economic discourse. Please, dear reader, throw out your prejudices and pay attention to what the scolds have predicted, and compare that to what has actually come to pass over the last 4+ years. The current deficit spending issue needs to be quietly shelved and we need to move towards promoting full employment of American citizens. Further shrinking the federal government at this time does not help the private sector increase employment - in fact it promotes the opposite effect!
A link to the Krugman article is here. Excerpt from Mar 10th, 2013 NYT Op-Ed by Paul Krugman:
For three years and more, policy debate in Washington has been dominated by warnings about the dangers of budget deficits. A few lonely economists have tried from the beginning to point out that this fixation is all wrong, that deficit spending is actually appropriate in a depressed economy. But even though the deficit scolds have been wrong about everything so far - where are the soaring interest rates we were promised? - protests that we are having the wrong conversation have consistently fallen on deaf ears.
What's really remarkable at this point, however, is the persistence of the deficit fixation in the face of rapidly changing facts. People still talk as if the deficit were exploding, as if the United States budget were on an unsustainable path; in fact, the deficit is falling more rapidly than it has for generations, it is already down to sustainable levels, and it is too small given the state of the economy.
Start with the raw numbers. America's budget deficit soared after the 2008 financial crisis and the recession that went with it, as revenue plunged and spending on unemployment benefits and other safety-net programs rose. And this rise in the deficit was a good thing! Federal spending helped sustain the economy at a time when the private sector was in panicked retreat; arguably, the stabilizing role of a large government was the main reason the Great Recession didn't turn into a full replay of the Great Depression.
But after peaking in 2009 at $1.4 trillion, the deficit began coming down. The Congressional Budget Office expects the deficit for fiscal 2013 (which began in October and is almost half over) to be $845 billion. That may still sound like a big number, but given the state of the economy it really isn't.
Bear in mind that the budget doesn't have to be balanced to put us on a fiscally sustainable path; all we need is a deficit small enough that debt grows more slowly than the economy. To take the classic example, America never did pay off the debt from World War II - in fact, our debt doubled in the 30 years that followed the war. But debt as a percentage of G.D.P. fell by three-quarters over the same period.
Right now, a sustainable deficit would be around $460 billion. The actual deficit is bigger than that. But according to new estimates by the budget office, half of our current deficit reflects the effects of a still-depressed economy. The "cyclically adjusted" deficit - what the deficit would be if we were near full employment - is only about $423 billion, which puts it in the sustainable range; next year the budget office expects that number to fall to just $172 billion. And that's why budget office projections show the nation's debt position more or less stable over the next decade.
So we do not, repeat do not, face any kind of deficit crisis either now or for years to come.
There are, of course, longer-term fiscal issues: rising health costs and an aging population will put the budget under growing pressure over the course of the 2020s. But I have yet to see any coherent explanation of why these longer-run concerns should determine budget policy right now. And as I said, given the needs of the economy, the deficit is currently too small.
Put it this way: Smart fiscal policy involves having the government spend when the private sector won't, supporting the economy when it is weak and reducing debt only when it is strong. Yet the cyclically adjusted deficit as a share of G.D.P. is currently about what it was in 2006, at the height of the housing boom - and it is headed down.
Yes, we'll want to reduce deficits once the economy recovers, and there are gratifying signs that a solid recovery is finally under way. But unemployment, especially long-term unemployment, is still unacceptably high. "The boom, not the slump, is the time for austerity," John Maynard Keynes declared many years ago. He was right - all you have to do is look at Europe to see the disastrous effects of austerity on weak economies. And this is still nothing like a boom.
Now, I'm aware that the facts about our dwindling deficit are unwelcome in many quarters. Fiscal fearmongering is a major industry inside the Beltway, especially among those looking for excuses to do what they really want, namely dismantle Medicare, Medicaid and Social Security. People whose careers are heavily invested in the deficit-scold industry don't want to let evidence undermine their scare tactics; as the deficit dwindles, we're sure to encounter a blizzard of bogus numbers purporting to show that we’re still in some kind of fiscal crisis.
But we aren't. The deficit is indeed dwindling, and the case for making the deficit a central policy concern, which was never very strong given low borrowing costs and high unemployment, has now completely vanished. A version of this op-ed appeared in print on March 11, 2013, on page A21 of the New York edition with the headline: Dwindling Deficit Disorder.