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Budget-deficit mania ignores America’s biggest economic challenge

Robert Reich, professor of public policy | November 12, 2010

We’re in for another round of budget-deficit mania.

The first draft of the President’s deficit commission, written by its co-chairmen Erskine Bowles and Alan Simpson, is a pastiche of ideas – some good, some dumb, some intriguing, some wacky. The only unifying principle behind their effort seems to be to throw enough at the wall that something’s bound to stick.

At their best, presidential commissions focus the public’s attention — not only on the right solution to some important problem but also on the right problem. Sadly, this preliminary report does neither.

As to solution, the report mentions but doesn’t emphasize the biggest driver of future deficits  – the relentless rise in health-care costs coupled with the pending corrosion of 77 million boomer bodies. This is 70 percent of the problem, but it gets about 3 percent of the space in the draft.

The report suffers a more fundamental error — the unquestioned assumption that America’s biggest economic challenge is to reduce the federal budget deficit.

The size of the budget deficit (and cumulative debt) is meaningless without reference to the size of the economy. What looks like a big debt 10 or 20 years from now may turn out to be small if growth has been rapid in the intervening years. By the same token, a seemingly small future debt can become unmanageable if the economy tanks, or barely grows at all.

In 1945, the nation’s debt was 120 percent of GDP. That proved to be no problem in later years, not because the debt shrank but because the U.S. economy soared.

Our biggest problem isn’t the size of pending federal budget deficits or debt but an anemic recovery that may drag on for years. And unless we’re careful, budget-deficit mania may further slow economic growth – thereby making future debts even less manageable.

If Congress and the President started right now to cut the federal deficit – slashing spending and raising taxes on the middle class – our anemic economy would quickly become comatose.

That’s because consumers still aren’t spending much. They’re overburdened by personal debt and don’t qualify for new bank loans. And absent enough consumers, businesses still aren’t spending on new factories, equipment, additional hiring.  Instead, they’re expanding capacity abroad, buying back their own shares of stock, and gobbling up other companies. Exports can’t possibly make up the slack.

That leaves government. Until we get out of the gravitational pull of the Great Recession, government is the only remaining booster rocket. If anything, we need more government spending and lower taxes on the middle class. This means bigger deficits, at least for the time being.

Even worse, budget-deficit mania will slow future growth if it forces government to cut the things that fuel growth  – education, basic R&D, child health, improved infrastructure.

No smart family would choose to balance the family budget over borrowing money to send the kids to college. The same logic holds for the nation as a whole. If certain government spending generates higher future productivity, we’d be nuts not to make the investment just to avoid a larger deficit.

Public investments like these are becoming ever more important to our future well being because private investment is more footloose globally. Giant American-based companies are now making more money abroad – and investing more there — than in the U.S. How do we get global capital to create good jobs in America? By having the skills and infrastructure to attract it.

Yet the deficit maniacs often want to slash spending across the board, including such key investments. And they often want to eliminate tax breaks that encourage these investments. (The Bowles-Simpson report is guilty of this.)

Don’t get me wrong. America’s projected budget deficits require attention. But in addressing them we need to focus on the right solutions, and make sure we’re solving the right problem.

The preliminary report of the President’s deficit commission doesn’t help. It’s another example of budget-deficit mania generating more heat than light.

Cross-posted from Robert Reich’s blog.

Comments to “Budget-deficit mania ignores America’s biggest economic challenge

  1. Well budget deficit can be deal with two ways. Either one can earn more money or can spend less – it is as simple as that. However that depends on person to per how to manage that.
    — Budget Deficit

  2. “On that note, what kind of ethical immigration reform would you propose? I don’t think it is practical or ethical to attempt to selectively exclude a group of people from our economy because of an assumption that that group will never succeed in America. ”


    This is precisely the immigration policy of Canada. I find it highly ethical. Immigration is supposed to be a benefit to the citizens of a country by encouraging the in migration of skilled and talented people. Clearly, Hispanic immigration is not bringing skills and talent into the US. (Mainly its bringing in peon labor for the hotel, restaurant, construction, and illegal narcotics industries.) Allowing Mexico, with the 14th highest GDP in the world, to dump its poorest citizens on the US, and demanding that its middle and working class be “welcoming” is simply a bizarre and self destructive national policy.

    Personally, I support a total immigration moratorium. The case that it benefits our country is lame to laughable. But the case that it drives down wages, opportunities, and social capital, while driving up crime, single parenthood, and a whole bunch of other social pathologies is sound.

  3. The greatest point that this post and comments seem to be making is that finger-pointing is the state of American dialog.

    There are far more basic failure modes that must be fixed before problems like budget deficits can begin to be solved. For instance, greed is at the top of the list of cultural values that determine the success or failure of civilization.

    First and foremost, the Golden Rule appears to be a dead commandment around the world where it is far too easy for the rich and powerful to take and giving is out of the question because everyone else will just waste. And this is truly a paramount issue that dominates the success or failure of budget deficits.

  4. The size of the budget deficit (and cumulative debt) is meaningless without reference to the size of the economy. What looks like a big debt 10 or 20 years from now may turn out to be small if growth has been rapid in the intervening years. By the same token, a seemingly small future debt can become unmanageable if the economy tanks, or barely grows at all.

  5. Wealth is created with spending that has positive multiplier effect. That is the whole point of macroeconomics. Problem is having negative multiplier effect, for example as listed in Galbraith, American Capitalism Ch. 8, and Thurow, Head to Head, p. 161-162. The University of California Press published a book about this in 1986, titled The Overburdened Economy, by Lloyd Jeffrey Dumas.

    Dumas categorized economic activity as contributive, neutral and distractive. All are needed, but not an economy with lack of contributive activity, as happens now here, with distractive economic activity crowding out all other. In light of that, the first step is to have a countervailing power against deficit spending.

  6. “As to solution, the report mentions but doesn’t emphasize the biggest driver of future deficits – the relentless rise in health-care costs coupled with the pending corrosion of 77 million boomer bodies. This is 70 percent of the problem, but it gets about 3 percent of the space in the draft.”

    This is not so. But it’s fashionably PC for Reich to blame old white people, who rank right behind rednecks in the left wing pantheons of antiprogressives we would like to see suffer.

    The biggest driver of deficits is rapidly becoming public education, welfare, and health care for ineducable immigrants from Latin America. Global corporations somehow got the idea that since most of our economy is consumption based, the yellow brick road to economic riches is the importation of consumers, rather than producers. But this is a dumb scheme because, in order to prosper in a first world economy, immigrants need plastic skill sets to achieve more than just subsistence wages. But as our extremely immigrant friendly public schools have demonstrated in CA, there is no Coupe de Ville at the bottom of the Cracker Jacks Box of Hispanic immigration — the majority of immigrants are epic failures in the classroom, largely incapable of adapting to a knowledge based economy. Our New Americans have the same low ability as the Old Mexicans, Guatemalans, and Hondurans; which should come as no surprise to folks with common sense since the sad condition of the countries they left is a collective expression of the individual capabilities of their citizens.

    Unless wealth can be extracted from the ground with solar powered pumps, the US is headed toward the poverty, corruption, and chaos of Latin America (cf, Venezuela) as a nation no matter which one of Robert Reich’s policy gems we adopt. We are seeing this rather violent economic and social transformation happening now. Recall that it is the minority mortgage meltdown in five states with the most Hispanic immigrants that triggered the current Great Recession. And people like Reich will keep playing on their progressive fiddles as Rome burns.

    • I cannot see how you could possibly conclude that Latin American immigrants are the primary cause of the federal budget deficit. Immigrants are not ineducable; immigrants assimilate culturally and linguistically to the US within few generations. As for the idea that immigrants’ poor academic performance is due to an inability to acquire knowledge or skills, that is pure conjecture. The notion that Latin American immigrants are being imported as consumers is ludicrous. Many immigrants have little money to spend, and many undocumented immigrants do not attempt to use social services such as welfare for fear of deportation. If anything, the aforementioned “global corporations” would want to import immigrants because they produce more than they consume.

      Whatever the cause of the deficit, I agree with Reich that the biggest economic challenge is not to simply reduce the deficit by any means necessary, but rather to take steps that will in the long-term allow the US to recover, even if such steps would require a short-term spending increase. Maybe you disagree, but I don’t see how that warrants an immigrant bashing.

      • Any informed person in California knows that spending on illegal alien Hispanics and their children accounts for the entirety of California’s budget deficit. You gotta ask yourself — California has gone through good and bad times before — why is this recession the worst on record? The answer appeared recently in the SF Chronicle: Hispanic kids are now the majority in CA’s public schools, and nearly all of them come from families receiving public assistance. Half will drop out. Fewer than 7% will qualify for some form of higher education. Nobody believes they will grow up to be engines of prosperity that their East Asian immigrant classmates will be. So enough with the cracks about immigrant bashing; I believe East Asian immigrants have largely been a positive thing for California.

        But our country has had over a 100 years of experience with Hispanic immigration, particularly in places like New Mexico and Texas. Hispanics do not economically prosper. They are a permanent impoverished proletariat who are rapidly becoming the largest beneficiaries of state and federal assistance programs.

        Don’t believe me? Check out the multi-generational study of Mexican-American assimilation by two UCLA sociologists, Vilma Ortiz and Edward E. Telles of UCLA’s Chicano Studies Research Center.

        The title of their report: “Generations of Exclusion: Mexican Americans, Assimilation, and Race.”

        Their main conclusion:

        “Despite sixty years of political and legal battles to improve the education of Mexican Americans, they continue to have the lowest average education levels and the highest high school dropout rates among major ethnic and racial groups in the United States.”

        After the second generation, it appears that assimilation and educations abruptly stagnates, then actually declines into the third and fourth generation. Hispanics are America’s least successful immigrants and yet our immigration policies encourage further growth of the Amerindian Hispanic population, who ultimately will never catch up to the white or East Asian population in terms of education, wealth, and positive societal behaviors. And the cost of their deficiencies will be borne by other more successful ethnic groups. So why must we persist in an immigration policy that harms America in the long term.

        • That the entirety of California’s budget crisis is due to Hispanic immigrants is a very lofty claim, and I don’t agree with it. An increasing Hispanic immigrant population in public schools and high high school drop out rate among Hispanic immigrants does not necessarily correlate to a budget deficit of unprecedented scale as there are other convoluted variables to consider.

          California is unique in its hispanic immigrant situation, but it is also unique in other ways. For example, before proposition 25 was passed, California was one of only three states in the nation to require a supermajority vote to pass the annual budget, and since the passage of proposition 13, and the only state to require both a supermajority to pass a budget and a supermajority to raise taxes.

          The conclusion you put in quotations seems more of an observation than a conclusion. It seems hard to believe that those authors actually concluded, as you seem to have, that these immigrants will never catch up to other racial groups and are destined to poor academic and economic performance. The cost of education for Hispanic immigrants is major. On that note, what kind of ethical immigration reform would you propose? I don’t think it is practical or ethical to attempt to selectively exclude a group of people from our economy because of an assumption that that group will never succeed in America. The attempt to close our border has been costly and futile. If you favor restricting educational access to select groups of people, fine, I guess we can just agree to disagree.

          • David, your suspicion that the Ortiz and Telles study is being used perversely is entirely justified. See my blog post and the exchanges in response to it here, especially my comment in response to a similar cynical misrepresentation of the conclusions they reached:

            It helps if you cite the actual conclusions that Telles and Ortiz reached in Generations of Exclusion about the causes of Mexican American progress slowing in the second generation. To quote:

            Telles and Ortiz identify institutional barriers as a major source of Mexican American disadvantage. Chronic under-funding in school systems predominately serving Mexican Americans severely restrains progress. Persistent discrimination, punitive immigration policies, and reliance on cheap Mexican labor in the southwestern states all make integration more difficult. The authors call for providing Mexican American children with the educational opportunities that European immigrants in previous generations enjoyed. The Mexican American trajectory is distinct—but so is the extent to which this group has been excluded from the American mainstream.

          • The prosperity of a state is ultimately determined by the value of its human capital as tiny countries like Taiwan and Singapore clearly demonstrate. The claim that Hispanics are bankrupting California is hardly lofty. LA county alone spends over a billion dollars on feeding, housing, and educating just the illegal Mexican population and their children within it’s boundaries; they are now in the process of selling of public buildings built with bonds paid for by taxpayers long deceased to pay their bills. In CA, school costs (including ESL and free breakfast, lunch and dinner food services) are now the biggest driver of the illegal alien costs, which happen to also make up over half the CA state budget. So if half of public school kids are Hispanic, and approximately 85% of these are illegal or the children of illegals, there you have simple back of the envelop estimate that perhaps up to a quarter of the CA budget gets expended on children who will not grow up to be middle class or better. And their tax obligation will essentially be nil, yet they will avail themselves of public benefits paid for by CA more successful citizens. Right now, through obligation bonds CA is hiding the real costs of the demographic transformation of our state, but there will come a day when the state can no longer borrow a single flat dime; or even pay back the hundreds of billions it has borrowed. And whites will no longer move here because taxes are too high and land is unaffordable. White ethnic cleansing was first practiced by Coleman Young in Detroit and see what happened there. Now we are about to see what happens when a whole state gets ethnically cleansed.

            To quote UT Professor Jose Angel Gutierrez, founder of La Raza: “We have an aging white America. They are dying. They are ******** in their pants with fear! I love it!…We have got to eliminate the gringo, and what I mean by that is if the worst comes to the worst, we have got to kill him.”

            No need. The Gringo will simply quietly withdraw, taking their kids out of CA public schools and moving to places where land is more affordable and they are not forced to pay for the high social costs of Hispanic immigration.

          • Dear Rosemary,

            CA schools are not chronically underfunded; indeed, they are generously funded. CA spends on average $11,000 per pupil. In fact, the amount is much higher in places like Los Angeles county when you add in the multiplier effect of public construction bonds and social services. And up until Prop 227 was passed, CA schools accommodated Hispanic children in the language they speak in their homes. Many Hispanic children avail themselves of newly built schools with state of the art classrooms in places like West Contra Costa and Alameda County. Yet, Hispanics are still academically failing. How long must we run this experiment? How much more money do we need to spend before we disprove the subjective interpretations of Telles and Ortiz that “Chronic under-funding in school systems predominately serving Mexican Americans severely restrains progress.”

            As for “reliance on cheap Mexican labor in the southwestern states all make integration more difficult,” have you even asked yourself what this means? Cheap labor is actually not cheap at all since illegal Mexicans are not paid enough to be self supporting in this country or even contribute enough in taxes to pay for the services they and their abundant children need. And the fact that the flood of immigrant Mexican continues means labor only gets cheaper. But somehow their breaking into our country remains an attractive option because wages in the US are still many fold higher than in Mexico, and they can avail themselves of the Gringo’s foolishly generous social safety net.

  7. Yes, but there is also the multiplier effect. Obama spends money in all the wrong ways, with negative multiplier effect: $4.b Billion for “clean coal” (won’t work), subsidies for farming that increases health care costs, subsidies for PV instead of ST (increasing instead of decreasing electricity rates), etc. For an article about the latter see:

    It very Keneysian (General Theory, p. 380-381) to oppose Obama.

  8. 14 November, 2010

    Robert Reich, as always, is on point! Let’s get him back
    into Washington, D.C. because current government really
    needs to hear from someone with a sane grip on solving
    this crisis in the short term and over the long haul.

    Reinvestment in the public sector is more than necessary
    in these times because no one can afford to “pay for their
    own” public services, as the Republicans and their Democratic allies “dream” that we all should do.

    Without “quality” public schools that teach our youth the basic three R’s plus personal integrity and cultural competence, this whole society is doomed. Without Public Health Services for prevention and affordable Health care for everyone, I cannot imagine the quantity of illness, absenteeism, suffering and death that would ensue.

    Without economic supports for small businesses, that employ
    more than 75% to 80% of the American public, there will be
    no jobs, period! Leftover, rehashed Reagan-omic trickle-down theories of enriching the rich to (re)employ the poor and the working class are worn out “laissez-faire” dogma that died with
    the dog! This kind of selfish thinking has contributed as much to the theft of public dollars by bankers and wall street (the Stimulus package) and the unemployment problems of the American worker as have the “run-away” shops (to Asia) of big business. Without housing supports, these real estate vultures and bank-foreclosure vampires will continue to feed, unabated,
    on the American people until almost all of us are homeless and
    living in the street.

    Rather the upper-tier wealthy and fortune 500 companies
    should bite the bullet and pay their fair share now than
    let the weight of stagnant (undistributed) economic wealth break the backs of the American public and dissolve this country’s democratic infrastructures.

    People seem to forget that this country, a “republic based on
    democratic principles” (see “The Federalist Papers”, 9-13), has to have money to function. That money comes from our taxes, and the well-managed spending of those revenues gives us, the American people, the high quality of life, that “pursuit of happiness”, which we have all come to know and enjoy.

    So to Congress, and the new Speaker, I say “get over it”. You
    are in government: make it work as it should to serve the public that pays you!!!

    To the White House and its economic advisors, I say Take Heed of Robert Reich’s advice, lest ye fall into a pit from which you cannot extricate yourselves or us! Thank you.

  9. I think the United States is going to have to do an enormous amount of adjusting over the next 30 to 40 years – adjusting both to sort of environmental limits that we’re now starting to become aware of adjusting to Chinas emergence as a major power, followed by India’s emergence as a much more consequential state. I think the globalization will affect us the same way it affects everybody else, and that’s gonna require some adjustments.

  10. This post is one more passage for our epitaph.

    One really has to wonder whether our civilization will survive the failures of all our institutions to prevent the out of control conditions of political, economic, moral and environmental chaos we are experiencing today.

    We argue things that are going wrong ad nauseam, ad infinitum but we appear to have absolutely no leadership that is capable of preventing the self-destruction of the human race.

  11. I like to read your insights to problem solving,but like Alan Gray said
    no one within the inner circle of Obama’s Economic advisers,can focus on any
    direction that would jump start this anemic Economic third world Country.Lower the dollar? Insult the Chinese who holds 1.4 trillion of our devalued dollar.Not real Diplomatic!.Rebuild our industrial base,educate those to run it,what would you estimate the lead time on that would be, 10 years.During the mean time what would the ballooning Dept be doing?.Do you think Bush was right when he said the Iraqi War would pay for its self?.Or do you think the Tax Rate on the middle will sore,To find the money to pay for all the Bad decisions some of the worst public servants have ever made?.
    I can deduce some of what you say however; my lack of formal education leaves much to be desired.Some clarity would sure be appreciated.

  12. I agreed with Robert untill he wrote,”No smart family would choose to balance the family budget over borrowing money to send the kids to college.”
    What kind of school do people come from to develope such logic?
    Maybe that is the logic that put us where we are at.

  13. Well said.

    To pull out of the problem, I think you need a combination of short, medium and long term strategies. The politicians, aided by their advisors always appear to be focused on short term massive action. By doing that, I believe they have only postponed a nasty crash.

    Their initial actions were taken just prior to what they saw as a looming catastrophe, so it seems nobody was even thinking about how you recover from the proposed actions. Later actions have compounded and delayed the problem, making it appear there is progress.

    Now, not only do they need to plan how to get out of this mess, but they need to work out how to explain and “sell” the plan to everyone – people, business, trading partners. I don’t think they are doing that at all.

    Keep the discussion going, Robert, the President’s deficit commission has to change their thinking, but they are surrounded by so much noise they can’t hear you yet.


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