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Why we should stop obsessing about the federal budget deficit

Robert Reich, professor of public policy | November 19, 2012

I wish President Obama and the Democrats would explain to the nation that the federal budget deficit isn’t the nation’s major economic problem and deficit reduction shouldn’t be our major goal. Our problem is lack of good jobs and sufficient growth, and our goal must be to revive both.

Deficit reduction leads us in the opposite direction — away from jobs and growth. The reason the “fiscal cliff” is dangerous (and, yes, I know – it’s not really a “cliff” but more like a hill) is because it’s too much deficit reduction, too quickly. It would suck too much demand out of the economy.

But more jobs and growth will help reduce the deficit. With more jobs and faster growth, the deficit will shrink as a proportion of the overall economy. Recall the 1990s when the Clinton administration balanced the budget ahead of the schedule it had set with Congress because of faster job growth than anyone expected — bringing in more tax revenues than anyone had forecast. Europe offers the same lesson in reverse: Their deficits are ballooning because their austerity policies have caused their economies to sink.

The best way to generate jobs and growth is for the government to spend more, not less. And for taxes to stay low – or become even lower – on the middle class.

(Higher taxes on the rich won’t slow the economy because the rich will keep spending anyway. After all, being rich means spending whatever you want to spend. By the same token, higher taxes won’t reduce their incentive to save and invest because they’re already doing as much saving and investing as they want. Remember: they’re taking home a near record share of the nation’s total income and have a record share of total wealth.)

Why don’t our politicians and media get this? Because an entire deficit-cutting political industry has grown up in recent years – starting with Ross Perot’s third party in the 1992 election, extending through Peter Petersen’s Institute and other think-tanks funded by Wall Street and big business, embracing the eat-your-spinach deficit hawk crowd in the Democratic Party, and culminating in the Simpson-Bowles Commission that President Obama created in order to appease the hawks but which only legitimized them further.

Most of the media have bought into the narrative that our economic problems stem from an out-of-control budget deficit. They’re repeating this hokum even now, when we’re staring at a fiscal cliff that illustrates just how dangerous deficit reduction can be.

Deficit hawks routinely warn unless the deficit is trimmed we’ll fall prey to inflation and rising interest rates. But there’s no sign of inflation anywhere. The world is awash in underutilized capacity As for interest rates, the yield on the ten-year Treasury bill is now around 1.26 percent – lower than it’s been in living memory.

In fact, if there was ever a time for America to borrow more in order to put our people back to work repairing our crumbling infrastructure and rebuilding our schools, it’s now.

Public investments that spur future job-growth and productivity shouldn’t even be included in measures of government spending to begin with. They’re justifiable as long as the return on those investments – a more educated and productive workforce, and a more efficient infrastructure, both generating more and better goods and services with fewer scarce resources – is higher than the cost of those investments.

In fact, we’d be nuts not to make these investments under these circumstances. No sane family equates spending on vacations with investing in their kids’ education. Yet that’s what we do in our federal budget.

Finally, the biggest driver of future deficits is overstated — rising health-care costs that underlie projections for Medicare and Medicaid spending. The rate of growth of health-care costs is slowing because of the Affordable Care Act and increasing pressures on health providers to hold down costs. Yet projections of future budget deficits haven’t yet factored in this slowdown.

So can we please stop obsessing about future budget deficits? They’re distracting our attention from what we should be obsessing about — jobs and growth.

Cross-posted from Robert Reich’s blog.

Comments to “Why we should stop obsessing about the federal budget deficit

  1. Yes, “we should stop obsessing about the federal budget deficit”.

    Remember Winston Churchill’s famous exhortation during the Battle of Britain:

    “Never, Never, Never Give Up”

    During the last 100 years the greatest threats to British, and American Democracy have been:

    Fascism (WWII)
    Communism (Cold War)
    Terrorism (21C)
    Republicanism (2012 Elections)

    Thankfully, our 2012 elections prove that we have a leader in Obama who can overcome the GOP’s politics of fear and hate.

    We appear to have given up on global warming, nuclear fusion generation/desalination power plants, poverty, etc. and it’s time to focus on our long-term future at last.

    Our newest generations made the difference during the 2012 elections and they have proven that they can make the right things happen to protect their future.

    • I take the perspective that the greatest threat to British and American democracy is fear. We are afraid of Communism. Why? That is a form of government and if the leaders and the led are satisfied with the contract, all is well. I think the rest of the world is, and should be, afraid of the US. This democracy has in fact dropped 2 atomic weapons on civilians of another nation, it has used chemical and biological weapons against its enemies, it has tested nuclear, chemical, and biological weapons on it’s own civilians and military. Pardon me, you just came off sounding a little to pro USA there and I just want the record to be straight.

  2. Mr Reich: Respectfully, I could not disagree with you more. Jobs and Growth are going to require more fuel. We already agree that America is over consumptive and you want to increase that? Unsustainable is a pretty word but it means, not possible to survive with current practices and you want to increase that. Do you deny that 4% (the population of the United States represents 4% of the global population) of the planet’s population is consuming 40% of the resources drawn from said planet? What happens when China and India, conservatively use 40% of the same resources. Wait a minute, we don’t have 120% of resources to offer so the only fair thing to do is split between them the remaining 60%. Sorry, all other people.

    No Sir. Jobs and Growth will only lead to war.
    US Population: somewhere around 3 to 400 million
    China Population: somewhere around 1.9 billion people
    India Population: somewhere around 1.7 billion people

    Are you still certain Growth is what we need?

  3. Here is why the deficit and debt is a big deal:

    1. It creates uncertainty. With debt over 100% of GDP, the ability of the US government to repay its debts comes in doubt. Our future (spiralling debt?) becomes very unpredictible. Uncertainty holds back investors and slams down the velocity of money, as we see today with all the Federal Reserves money sitting on the sidelines.

    2. Debt has to be repaid. Either through taxes or printing money (inflation). As we know taxation kills. Printing money (which we’ve seen drastically over the last fews) creates the stem to high inflation which is economic toxic, excentuating the boom-bust cycle.

    3. Such debt essentially equivicates to the ‘crowding out’ of the private sector. Instead of investing in privates markets that demand money to be put to good use, investors buy government debt. Likewise, instead of getting new shoes, your Grandma buys some government debt. (For Keynesians – what does this do for aggregate demand?)

    4. I agree that growth is the best way to fix the debt. But lets get real, with a real plan to get our deficits down and make the world more certain about our fiscal sustainability.

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