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Don’t fall for the GOP line: There is no budget crisis. There’s a job and growth crisis.

Robert Reich, professor of public policy | July 28, 2011

A friend who’s been watching the absurd machinations in Congress asked me “what happens if we don’t solve the budget crisis and we run out of money to pay the nation’s bills?”

It was only then I realized how effective Republicans lies have been. That we’re calling it a “budget crisis” and worrying that if we don’t “solve” it we can’t pay our nation’s bills is testament to how successful Republicans have been distorting the truth.

The federal budget deficit has no economic relationship to the debt limit. Republicans have linked the two, and the Administration has played along, but they are entirely separate. Republicans are using what would otherwise be a routine, legally technical vote to raise the debt limit as a means of holding the nation hostage to their own political goal of shrinking the size of the federal government.

In economic terms, we will not “run out of money” next week. We’re still the richest nation in the world, and the Federal Reserve has unlimited capacity to print money.

Nor is there any economic imperative to reach an agreement on how to fix the budget deficit by Tuesday. It’s not even clear the federal budget needs that much fixing anyway.

Yes, the ratio of the national debt to the total economy is high relative to what it’s been. But it’s not nearly as high as it was after World War II – when it reached 120 percent of the economy’s total output.

If and when the economy begins to grow faster — if more Americans get jobs, and we move toward a full recovery — the debt/GDP ratio will fall, as it did in the 1950s, and as it does in every solid recovery. Revenues will pour into the Treasury, and much of the current “budget crisis” will be evaporate.

Get it? We’re really in a “jobs and growth” crisis — not a budget crisis.

And the best way to get jobs and growth back is for the federal government to spend more right now, not less — for example, by exempting the first $20,000 of income from payroll taxes this year and next, recreating a WPA and Civilian Conservation Corps, creating an infrastructure bank, providing tax incentives for small businesses to hire, expanding the Earned Income Tax Credit, and so on.

But what happens next week if Congress can’t or won’t deliver the President a bill to raise the debt ceiling? Remember: This is all politics, mixed in with legal technicalities. Economics has nothing to do with it.

One possibility, therefore, is for the Treasury to keep paying the nation’s bills regardless. It would continue to issue Treasury bills, which are our nation’s IOUs. When those IOUs are cashed at the Federal Reserve Board, the Fed would do what it has always done: Honor them.

How long could this go on without the debt ceiling being lifted? That’s a legal question. Republicans in Congress could mount a legal challenge, but no court in its right mind would stop the Fed from honoring the full faith and credit of the United States.

The wild card is what the three big credit-rating agencies will do. As long as the Fed keeps honoring the nation’s IOUs, America’s credit should be deemed sound. We’re not Greece or Portugal, after all. We’ll still be the richest nation in the world, whose currency is the basis for most business transactions in the world.

Standard & Poor’s has warned it will downgrade the nation’s debt from a triple-A to a double-A rating if we don’t tend to the long-term deficit. But, as I’ve noted, S&P has no business meddling in American politics — especially since its own non-feasance was partly responsible for the current size of the federal debt (had it done its job the debt and housing bubbles wouldn’t have precipitated the terrible recession, and the federal outlays it required).

As long as we pay our debts on time, our global creditors should be satisfied. And if they’re satisfied, Standard & Poor’s, Moody’s, and Fitch should be, too.

Repeat after me: The federal deficit is not the nation’s biggest problem. The anemic recovery, huge unemployment, falling wages, and declining home prices are bigger problems. We don’t have a budget crisis. We have a jobs and growth crisis.

The GOP has manufactured a budget crisis out of the Republicans’ extortionate demands over raising the debt limit. They have succeeded in hoodwinking the public, including my friend.

Cross-posted from Robert Reich’s blog.

Comments to “Don’t fall for the GOP line: There is no budget crisis. There’s a job and growth crisis.

  1. I understand that a political climate has been festering in place to make it nearly impossible to push for any spending, even if it has good investment and job growth values.

    However, I must insist that since we are at war against terrorism for over a decade, we need to spend more (invest more) on the military and our troops. It is the right thing to do and I dare those who oppose it. We need to invest much more in the development and manufacturing of smart weapons here in the US, expend healthcare services for all military personnel (hire more healthcare workers in the VA, upgrade and build new VA hospitals across the States…), expend GI benefits in education and retraining (hire more teachers, counselors… to meet the educational and skill development needs of active and inactive GIs).

    Yes, to boldly invest in military manufacturing, healthcare, and education will require new taxes and borrowing. Since we have for years avoided to sacrifice and pay for the war on terror, it is time to make that belated commitment and in turn promoting economic growth and job creation with the initial sparks and fire powers from our patriotic and economic pledges to the military.

  2. I am an independent (not Red or Blue), but I happen to agree with Professor Reich (and many other economists for the record) on job creation. When a house is burning, it is not the time to conserve water. Yet, that is precisely what we are pushed to believe it is the best thing to do: cuts upon cuts while the economy is critically ill, (even facing the increasing likelihood of a double dip) and job growth is anemic. It certainly will not save the burning house by cutting the water supply (both privately and publicly) to the fire trucks.

    Some would argue, sure let the house burn to the ground because we need the water in the future and we can’t always count on future rainfall. The consequences of such logic will be more certain than future rainfall: many will suffer and be left out in the cold without shelter and protection.

  3. Unfortunately this economic crisis affected most of the countries and i do not think (and we can see that over past few years) that it will be fast or easy solution for everyone evolved.

    However, you are absolutely right, we should always remember who we are and use available resources sometimes more creatively with the greater effect.

    In times of even great difficulty, there are always lies opportunities. Or at least i’d like to think so.

  4. It will be interesting to see if the credit rating agencies still downgrade the credit of the US. I think Fitch just announced there will be no change.


  5. Seo in Greece brings up several points, including the questions:

    When Are We Going to Learn The Lessons of History, and What Shall Our Legacy Be?

    Why are we having to put up with a continuous diatribe of lies paid for by a right wing oligarchy that defies the lessons of history, attacking the stability of our civilization like so many oligarchies before ours?

    Our choice today is oligarchy or democracy and the oligarchs will only lead us into a condition of chaos like they have so many times before by taking equal rights, justice, opportunities for life, liberty, pursuit of happiness, fair distribution of wealth of our nation for all those who want to work hard to support their families, and quality of life away from the rest of us and future generations that shall have to suffer unacceptable consequences of our failures today.

    The debt debate has proven that the republican politicians have refused to learn the lessons of history and don’t want anyone else to be educated enough to understand them either. Instead they choose to distribute our wealth among the few very richest among us, while distributing poverty among the rest of us as the only form of equality that they are willing to provide.

    Interesting that the Athenian supreme archon Solon in 594 B.C. created the original Rule of Law to prevent revolution because of out of control inequalities and poverty such as we are increasingly experiencing today. Former Supreme Court Justice Sandra Day O’Connor has warned us that our system of justice has been overthrown by money and politics. Thus our Constitution is no longer fairly and impartially applied to all citizens.

    An interesting fact is that the United States government, during periods such as 1933-52 and 1960-65 followed the Rule of Law, accomplishing moderate and pacifying redistributions because it appears that enough politicians and judges had actually studied history and avoided the atrocious concentration of wealth among a small body of individuals who rule our government with the power of money granted to them by the republican party today.

    So our legacy today appears to be outrageous, continuous reductions in numbers of jobs for all Americans who want nothing more than to work hard to support our families to achieve an acceptable quality of life for our newest and future generations.

    Thus we are threatened with totally unacceptable consequences such as out of control poverty and climate changes that threaten the future of our civilization more than any other time in history due to our current state of out of control population growth and consumption, and oligarchy.

    Thus the nation that had everything it took to lead the world to the highest level quality of life for all in history is instead crashing and burning economically due to the consequences of power of money that are overthrowing our democracy, even though we were warned repeatedly by history and great leaders that we no longer seem to be producing or paying attention to due to the failures of our education system that has also been overthrown by the power of greed.

  6. We have the same problems in Greece as you may know. The corruption of the politics in general is responsible for all this, everywhere in the world!

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