Deficits Don’t Matter?

November 7th, 2010 by Whitey Leave a reply »

In a moment of honesty, Vice President Dick Cheney told a reporter, “Reagan proved deficits don’t matter” (source). Yet, more often the Republicans and their fringe backers, Fox News and the Tea Party, have made the public debt a source a public anxiety and anger. The reality is that deficit spending is required for a healthy economy, and we have been in much more debt in the past (i.e., during WWII) and we experienced the greatest boom and largest middle-class in our history (source). This is not an endorsement of “welfare for the rich, capitalism for the poor.” I think it is a crime when the government bails out corporations who have been irresponsible, and the public gets stuck with the bill. No, I strongly disagree with what went on during the Bush and Reagan years: Redistribution of lower-income/middle-class wealth to the rich, through corporate welfare (i.e., tax cuts/loopholes/shelters, no-bid contracts, bailouts, deregulation, privatization of public resources, etc.). But being against welfare for the rich does not mean all deficit spending is a bad thing. In fact, it may actually be essential for a thriving economy.

(Rick Seaman of Portland, Oregon, made this chart from data he found on TreasuryDirect.gov.)

Republicans seek to spook the population into balanced budget spending, but then they go on a spending spree when they are in power (see the chart above). Keynesian economics have proven over and over, and history bears this out, that during economic downturns government spending is essential for recovery. Some economists even insist that ongoing deficit spending is required for a vibrant economy, and deny that there is a downside. Republicans pose as the “fiscal conservatives” who are for “fiscal responsibility,” but this is a ridiculous claim. It is Democrats that have been the fiscal conservatives, and have tried to balance the budget during economic booms.

Joe Conason of Salon.com wrote that, “In our time, the Republican Party has compiled an impressive history of talking about fiscal responsibility while running up unrivaled deficits and debt. Of the roughly $11 trillion in federal debt accumulated to date, more than 90 percent can be attributed to the tenure of three presidents: Ronald Reagan, who used to complain constantly about runaway spending; George Herbert Walker Bush, reputed to be one of those old-fashioned green-eyeshade Republicans; and his spendthrift son George “Dubya” Bush, whose trillion-dollar war and irresponsible tax cuts accounted for nearly half the entire burden. Only Bill Clinton temporarily reversed the trend with surpluses and started to pay down the debt (by raising rates on the wealthiest taxpayers)…Not all of the warnings about deficit spending are false. Wasteful federal spending can eventually lead to inflation; excessive deficits can cause interest rates to rise, although that doesn’t always occur. But as Clinton proved in confronting the huge legacy of debt left over from the Reagan era, it is possible to raise taxes and slow spending without damage to the broader economy” (source).

According to their own stated standards, Republicans regularly commit the unpardonable sin of massive deficit spending. If we buy-in to their fear-mongering about deficit spending (even during recessions) then we must give Republicans very poor ratings. It is worth mentioning that when Republicans implement deficit spending, the spending usually ends up in the hands of the ultra-rich, who tend to save; whereas Democrats typically channel deficit spending to the middle-class, who are likely to spend, which leads to a stronger economy. There is a big difference between awarding no-bid military contracts to Haliburton and Blackwater, and on the other hand, extending unemployment benefits. Only the later actually ends up helping the economy.

Conason also points out that, even though deficit spending is an essential part of sound fiscal policy,”Not all of the warnings about deficit spending are false. Wasteful federal spending can eventually lead to inflation; excessive deficits can cause interest rates to rise,although that doesn’t always occur. But as Clinton proved in confronting the huge legacy of debt left over from the Reagan era, it is possible to raise taxes and slow spending without damage to the broader economy” (source). Tax rates in the U.S. are among the lowest of industrialized countries (only Mexico, Turkey, South Korea and Japan have tax rates lower than ours), and we spend more on our military than all other nations combined—if our deficit become a real problem, we could easily make some changes in these areas, without cutting “entitlements,” and wipe our our debt in a decade. Ron Paul has said, “Deficits mean future tax increases, pure and simple.” Perhaps there is truth to this. However, take a look at countries that have higher taxes. For example: Denmark.

While the U.S. tax revenues are about 26% of Gross Domestic Product (GDP), Denmark is about 48%. As a result, Denmark’s per capita GDP is ranked by the IMF as number five in the world, while the United States us listed as number eight (source). Denmark’s debt to GDP ratio is just over 40 percent, roughly one-third less than the United States. Its deficit for the year will be around 3 percent of GDP, approximately one-third of the size of the U.S. deficit. Denmark has also consistently been running large trade surpluses, building up claims against foreigners in contrast to the United States, which has been running large trade deficits (source). Along with Sweden, Denmark has the highest level of income equality in the world, with a 29 Gini Index (source); the U.S. scores at 45, between Uruguay and Camaroon. In measures of health, Denmark ranks better than the U.S. In life expectancy, Denmark is ranked 47th, and the U.S. 49th (source). Infant mortality ranking by the UN: Denmark ranked 15th, United States ranked 33rd (source). Both Demark and the U.S. have literacy rates of 99% (source), but 96% of Denmark’s high school students graduate, while the U.S. stands at a 72% graduation rate (source). We could go on, but the point is that higher taxes do not necessarily mean a weaker economy or a less competitive position in the global market. In many cases, higher taxes (and yes, deficits) can dramatically improve a nation’s competitiveness and quality of life.

The dire warnings about deficit spending and the national debt are mostly overstated. In 1996, during a Republican take-over of Congress, and President Clinton having caved to Republican demands, the academic journal Social Policy published a statement by a number of prominent economists, journalists, political policy analysts. They examined “the emergence of a misguided consensus among politicians that we need to ‘balance’ the federal budget” (source #40). The statement points out the flawed assumptions that “spending is out of control and that reducing the deficit will lead to long-term prosperity. Both of these assumptions are not supported by any evidence in U.S. history.”

The statement continues, “Instead of putting forth a sound program for addressing needs that government should address — like rebuilding our infrastructure — we are called upon to absorb the pain of budget cuts as a sacrifice that will yield a more stable economy for generations to come. The opposite is true.”

“Just as families and individuals borrow to invest in their futures — to pay for education, a home mortgage, a car, or starting a new business — our government has borrowed in the past to invest in the future of our people. Jefferson’s Louisiana Purchase created a big debt for a young nation but also doubled the size of our territory. When collective security — and the security of the world — was threatened in World War II, we borrowed at unparalled levels to pay for the war effort. The result was not just the defeat of fascism, but emergence from the Great Depression.”

The statement goes on to explain why balancing the budget does not work:

  1. Every sustained period of balancing the budget and reducing the national debt has been followed by a major economic depression. (The last time was in 1929. It happened five times before that in 1819, 1837, 1857, 1873, and 1893.)
  2. There has been chronic deficit spending since World War II, and this probably has prevented yet another major depression — the longest depression — free period in our history. Yet the nine recessions since World War II have all followed reductions in the deficit relative to Gross Domestic Product. The deficit reduction since 1992, from 4.9 to 2.3 percent of GDP, is the same pattern that immediately preceded the 1990-91 recession and the slow recovery that lingered through 1992, The economic growth of the 1980’s, moreover, came after increases in the deficit. The postwar pattern is clear; deficit increases are followed by increased growth, decreases are followed by contractions and recessions.
  3. The current levels of debt are not as high as many would have us believe. Viewed realistically as a proportion of the Gross Domestic Product — rather than as a misleading absolute number — the total debt is currently 71 percent of GDP, a figure that has been roughly unchanged for the past three years. (The proportion of debt held by the public is 51% of GDP.) The nation’s debt increased approximately sixfold from 1940 to 1946, and it was larger than the GDP in 1945, 1946, and 1947.
  4. Mandating no deficit makes it impossible for the government to spend the funds necessary in times of recession when human needs — for everything from support payments to public employment — increases markedly. If the government is bound by statute or constitutional amendment to have no deficit in such times, the situation will be worsened by even more cuts or tax increases.
  5. The climate for balancing the budget is really directed toward a reordering of government priorities. One goal of those calling for a balanced budget is not the attainment of fiscal responsibility but the dismantling of government social programs.

“We, the undersigned, are calling the “balanced budget” movement what it is — economically disastrous and socially calamitous. We call upon Congress and the President to abandon this goal and to invest the funds necessary to make America a more livable society by focusing on the creation of jobs, guarantee of health care and other issues of concern.”

Signatories included:

Gar Alperovitz, Elaine Bernard, Norman Birnbaum, Roscoe Brown, Timothy Canova, Eduardo Capulong, Noam Chomsky, Sheila Collins, Eugene Coyle, James Devine, Barbara Ebrenreich, Jeff Faux, Betty Friedan, Herb Gans, Alan Gartner, Audrey Gartner, Helen Lachs Ginsburg, Colin Greer, Chester Hartman, Philip L. Harvey, Andrew Humm, David Dyssegaard Kallick, Lowell S. Levin, Al Marcus, Robert McIntyre, Roy Metcalf, S.M. Miller, Janice Nittoli, Art Pearl, Dolores Perin, Frank Riessman, Sumner Rosen, Blair Sandler, Robert Schwartz, Lynn Turgeon, James Weinstein, William Vickery, June Zaconne.

Last year’s stimulus package is a good case study in this regard. Many economists said that the package was not large enough (just like many economists told FDR during implementation of the early New Deal programs). The Administration said that the stimulus would stop the bleeding and keep unemployment below 8%. It still hovers around 9%. Still, it is impossible to deny that they stimulus has been an indispensible component to stabilizing the economy. The bipartisan Congressional Budget Office estimates that unemployment would be above 11% without the stimulus (source; source2; source3). New York TIme columnist and recipient of the 2008 Nobel Prize in economics, Paul Krugman, recently said: The $1.4 trillion budget [2009] deficit is a triumph of fiscal policy, “We would have had Great Depression 2, [but] the deficit saved the world” (source). Although Krugman advocated for much larger stimulus spending, he has said, “Unlike governments of the past, which tried to balance budgets in the face of a plunging economy, today’s governments allowed deficits to rise. And better policies helped the world avoid complete collapse: The recession brought on by the financial crisis arguably ended last summer” (source).

This chart (from Rachel Maddow’s blog) is one obvious example of the success of the stimulus.

What do Republicans say when you ask them what they would cut? Example:

CHRIS WALLACE, FOX NEWS ANCHOR:  You want to extend all the Bush tax cuts which would add $4 trillion to the deficit.  You say balance the budget by cutting spending.  Question, as a bottom line businesswoman, where are you going to find $4 trillion to cut?

CARLY FIORINA ®, CANDIDATE FOR SENATE IN CALIFORNIA:  I think we ought to ban earmarks.  I think we ought to give citizens the opportunity to designate up to 10 percent of their federal income tax towards debt reduction.

WALLACE:  You could cut all of that out.  It wouldn‘t be anywhere close to $4 trillion.  Where are you going to get that kind of money if you extend all of the Bush-era tax cuts?  And that only adds to the deficit.  That doesn‘t even deal with the deficit we already have.

FIORINA:  Well, of course, first, the thing that we need to do to deal with our debt and our deficit is to both cut spending and grow the economy.

WALLACE:  Let me ask a specific question.  I still haven‘t gotten many specifics from you on how you‘re going to cut $4 trillion and even more out of the budget.  You tell me, specifically, what are you going to do to cut the billions, the trillions of dollars in entitlements?  What benefits are you going to cut?  What eligibility are you going to change?

FIORINA:  You see, Chris, I have – you know, Chris, I have to say with all due respect, you‘re asking a typical political question.

The Republican Economic Plan:

From Oliver Stone’s recent documentary, “South of the Border.” An interview with Néstor Kirchner, President of Argentina.

NÉSTOR KIRCHNER: [translated] Bush told me the best way to revitalize the economy is war and that the United States has grown stronger with war. Those were his exact words.

OLIVER STONE: Were there any eye-to-eye moments with President Bush that day, that night?

NÉSTOR KIRCHNER: [translated] I say it’s not necessary to kneel before power. Nor do you need to be rude to say the things you have to say to those who oppose our actions. We had a discussion in Monterey. I said that a solution to the problems right now, I told Bush, is a Marshall Plan. And he got angry. He said the Marshall Plan is a crazy idea of the Democrats. He said the best way to revitalize the economy is war and that the United States has grown stronger with war.

OLIVER STONE: War. He said that?

NÉSTOR KIRCHNER: [translated] He said that. Those were his exact words.

OLIVER STONE: Was he suggesting that South America go to war?

NÉSTOR KIRCHNER: [translated] Well, he was talking about the United States. The Democrats had been wrong. All of the economic growth of the United States has been encouraged by the various wars. He said it very clearly. President Bush is—well, he’s only got six days left, right?

OLIVER STONE: Yes.

NÉSTOR KIRCHNER: [translated] Thank God. [End of film clip]

JUAN GONZALEZ [Democracy Now! interview with Oliver Stone]: That was former President Kirchner. And these comments of President Bush that he says about the United States growing strong through war, I don’t think that’s ever been reported anywhere.

JUAN GONZALEZ: Well, on this issue of war and, of course, the statement that President Bush made, which to me was startling, is, in essence, when our government goes to war, not only does it spend huge amounts of money that it turns over to the contractors who assist the war, but also technological development always increases sharply, sponsored by the government. And then, after the war, these same companies then use the new technological development to open up new arenas of business. So, in that sense, I think Bush was talking about how war—

OLIVER STONE: Yeah.

JUAN GONZALEZ: —forces the productive forces ahead and allows capitalism to continue to exploit.

(Source)

Conclusion: Don’t believe Republican fear-mongering about deficit spending and the national debt. They don’t cut spending (unless it is cutting programs that help the low-income/middle-class), they increase spending when they are in power (esp. military spending and corporate handouts, incorrectly thinking it will “trickle down”). Democrats are more likely to spend on domestic priorities that drive the economy (though, they have many problems too). Right now, we are doing the right thing with stimulus spending—we may even need more spending to speed up the recovery. When the private sector stops spending, the government must spend to make up the difference to up-start the economy. In the current political atmosphere, Obama could only get so much included in the stimulus. But is has been enough to avoid catastrophe. The Republicans, who blocked additional stimulus, blame Democrats for failing to fix the problem their party leaders helped create under Bush. When the smaller stimulus is slow to improve the situation, they blame the “ineffective nature of the public sphere” (those “tax and spend liberals” can’t fix the economy, they say) and advocate a private industry fix through their typical policy prescription: tax cuts for the rich, which would significantly increase the deficit over time—which is more evidence that they are not serious about their alarmist rhetoric about the deficit. To get jobs moving again, why can’t both sides quit playing fear-politics, get together, and find some things to spend money on? (Programs that create jobs!) With John Boehner pulling the strings, I won’t hold my breath. Perhaps he could take an economics lesson from Dick Cheney.

See also: Krugman 10/10/2010, Krugman 10/31/2010,

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