Economy

Why the Deficit Is Simply Not an Economic Problem Now, or in Future Decades

The profound disconnect between what Americans expect to receive from the government in services, and what they expect to pay for it in taxes.

Despite ubiquitous claims to the contrary, the United States does not have a “deficit problem,” over either the short or the long term. That’s because a large fiscal deficit is an economic issue, and what we face is a political problem -- a profound disconnect between what Americans expect to receive from the government in services, and what they expect to pay for it in taxes.

That’s fueled, in large part, by a well-funded conservative movement that has convinced a significant portion of the population that they can live in a modern, highly developed country with decent infrastructure and a modest safety net, get an endless series of tax breaks and not take on a mountain of debt as a result. That mathematical impossibility represents a different problem; namely, a public that’s poorly informed about taxes and spending. It’s a low information problem.

We would have a deficit problem -- an economic problem -- if the right’s narrative of “runaway government spending” had some basis in reality.  But it doesn’t. Using data from the Organization for Economic Cooperation and Development -- the “rich countries’ club” whose members represent most of the world’s leading economies -- Sabina Dewan and Michael Ettlinger showed that between 2004 and 2007, the U.S. ranked 24th out of 26 countries in overall government spending as a share of our economic output.  Only Ireland and South Korea, both relative newcomers to the club, had a more “limited government” than we did during that span.

That share will rise in the coming years as the baby boomers move into their golden years and we offer health insurance to millions of Americans who couldn’t previously afford it, but given that our spending was about 7 percentage points below the OECD average -- and almost 20 percentage points beneath that of big spenders like France -- we still won’t have a very “big” government relative to the rest of the developed world.

We would also have an economic problem if we couldn’t afford to raise taxes to pay for what we, as citizens of a democracy, want the government to do -- if the Right’s narrative that we’re “being taxed to death” had some basis in reality. But, again, it doesn’t. In 2008, we ranked 26th out of the 30 OECD countries in our overall tax burden -- the share of our economy we fork over to the government -- coming in almost 9 percentage points below the average of the group of wealthy nations, and, again, some 20 percentage points below highly taxed countries like Denmark.

One can’t call something that’s readily fixable a “serious" problem, and economically our “budget gaps” are readily fixable -- we could raise revenues with the addition of, say, a Value Added Tax (probably the easiest way, politically), and we could do that as soon as the economy recovers or in 20 years from now.

Of course, raising taxes so they cover our government’s relatively modest spending is deeply unpopular with the electorate, which is, again, a political problem. And because that political reality is driven by the widespread but false belief that we have out-of-control government spending and are taxed to death, it is, again, a problem of an electorate with bad information.

The reason it’s important to understand that our budget gap is a not a structural economic problem is simple: presenting it as such -- and getting pretty much everyone to repeat the claim -- is giving America’s elites an opportunity to steal your Social Security, make seniors and vets pay a bigger chunk for their health care, and otherwise deepen their brutal assault on working America’s economic security.

Smart Framing Leads to Effective Propaganda

If you can frame the terms of a debate, you’ve gone a long way toward winning it, and the deficit hawks have been wildly successful in portraying our budget gap as a structural economic problem, driven by rising “entitlement” costs, that will get worse if unaddressed. The narrative has been echoed across the media -- NPR called the budget gap a “great problem,” the Washington Post reported on ”the gravity of the country's deficit problems,” and in Pete Peterson’s Fiscal Times, Henry Aaron falsely claimed that “all responsible budget analysts agree that the United States faces a daunting deficit problem” (emphasis mine).

These claims echo an ideologically driven framing of the issue -- one that assumes we spend too much and must cut back on the size of government, whether we would otherwise opt to do so or not. The solution, we are told again and again, is some “painful” combination of spending cuts and tax hikes.

But when one sees the deficit more accurately -- as a result of undertaxation relative to what we want the government to do, driven by a political problem caused by decades of conservative demagoguery about taxes -- different solutions arise, solutions that wouldn’t require “painful cuts” to popular domestic programs.

One could also just as easily choose to view the budget gap in other ways. As economist Dean Baker notes, “If the United States paid the same amount per person for health care as any of the 35 countries with longer life expectancies, we would be looking at huge budget surpluses for the indefinite future.” So we could look at it as a health-care costs problem, which could be addressed by opening up Medicare to all comers.

According to some estimates, over 90 percent of our national debt is the result of our “defense” spending, and the wars in Iraq and Afghanistan could turn out to effectively represent “unfunded mandates” of more than $3 trillion dollars. So we could look at the budget gap as an unsustainably expensive military problem, and address that issue directly without being forced to accept those “painful cuts” to Social Security, Medicare and other popular programs.

Tax reporter David Cay Johnston points to hundreds of billions in potential tax revenues being sheltered, legally and otherwise, in offshore havens and through various loopholes -- and tax subsidies -- worked by corporate America and the country’s highest earners. While tightening the tax code and stepping up enforcement might not close the entire budget gap, it’d go a long way in that direction, so one could easily view the issue we need to grapple with as a rich tax-dodger problem. Fixing that would not only be good policy, but also incredibly popular politics.

Not an Economic Problem in the Short or Long Term

As far as the conventional wisdom is concerned, the only question subject to debate is whether the deficit problem is an imminent threat that must be addressed now, or a long-term issue with which we’ll have to deal with, painfully, down the road at some point.

The former view is dangerously incoherent at a time when consumer demand -- which represents about 2/3 of America’s economic activity -- has fallen through the floor.  The short-term budget outlook is bad right now because tax revenues are down at a time when people need assistance the most. The federal government is acting as ‘the buyer of last resort’ -- boosting demand -- and keeping cash-strapped states from going under. To not run big short-term deficits at a time like this would be deeply irresponsible and inflict very significant economic pain.

But the claim that we face a dire long-term budget problem is highly questionable as well, and not only because it implies that the deficit is structural when we could make it go away by raising the U.S. tax burden not to Swedish or French levels, but just to the middle of the pack in the developed world.

It’s also dubious because even if we were to do nothing at all, those jumbo deficits supposedly looming in our future may never materialize. That’s because virtually every statement you hear about the deficit, whether uttered by a pundit, wonk or politician, is based on a set of projections put out by the Congressional Budget Office. And, as University of Texas economist James Galbraith argued in a recent interview with Ezra Klein of the Washington Post, those projections are, “strictly speaking, nonsense.”

Of the CBO’s assumption about how fast health-care costs will rise, Galbraith told Klein, “if health care does get that expensive, and we're paying 30 percent of GDP while everyone else is paying 12 percent, we could buy Paris and all the doctors and just move our elderly there.” Another way of looking at it is that instituting  Medicare-for-all is a political problem that will be overcome long before we end up spending 30 percent of our income in the health sector.

Galbraith explained another crucial flaw in the CBO forecasts to me via email: their assumption that short term interest rates will rise by 5 percent over the next 5 years, while they expect the rate of inflation to remain constant. “It's plainly preposterous,” he said. “Why would the Federal Reserve raise nominal interest rates by five points if inflation doesn't change at all?” It’s an incoherent narrative because the Fed raises interest rates to make government debt more attractive to investors when inflation is pressing down the value of the dollar. And inflation, for better or worse, results in our debt load decreasing relative to the overall economy. So if the inflation rate ends up being higher than forecast, or the interest the government has to pay on its debt ends up lower, that changes the whole long-term picture significantly.

Long-term projections are very sensitive to flawed assumptions. “It's that short-term interest rate combined with that low inflation rate that allows them to generate, quite mechanically, these enormous future deficit forecasts,” Galbraith told Klein. “At this point, the whole thing is completely incoherent…These numbers need to come together in a coherent story, and the CBO's forecast does not give us a coherent story.” So virtually everything that is said about our long-term “deficit problem,” is, according to Galbraith, “nonsense.”

That’s a vitally important point. Long-term projections have limited value in large part because they must err on the pessimistic side in order to have any value for planners. It’s certainly possible that the most dire fiscal projections could come to pass. Yet that means that every single news story you read about our “looming deficit crisis” provides a distorted view of the issue. Every one of them should in fact read, “possible deficit problem sometime in the future” -- that’s the objective reality.

It’s a Set-Up

As I write in my book, The Fifteen Biggest Lies About the Economy, practically everyone understands that “entitlements”—Social Security, Medicaid and Medicare -- and other programs that provide a cushion of sorts for working families are quite popular. That presents a challenge for conservatives: you just don’t get very far in American politics on the promise of cutting grandma’s health benefits.

Although many Americans respond positively to the idea of small government in the abstract, when it comes to specifics, people really like most, if not all, of what the government does.

So the Corporate Right has had to frame the debate on different terms. Armed with the rather dubious projections discussed above, they’ve presented the issue as a structural economic problem, arguing that the United States is headed toward a gazillion-dollar deficit just around the corner, and that the only way to stave off this looming budgepocalypse is to swallow the bitter medicine of “entitlement reform.”

As Glenn Hubbard, former chair of George W Bush’s Council of Economic Advisors, explained, “we have designed entitlements for a welfare state we cannot afford.” But it’s worth noting that in the CBO’s dire projections, the cost of those entitlements, if we do nothing at all to change them, is expected to increase by seven percentage points of GDP over the next 30 years -- which we could cover, if everything else remained constant, by bringing our tax burden up to the OECD average.

The problem for the rest of us is that, as is too often the case, the Right’s preferred narrative has been almost universally embraced by the mainstream media and pretty much our entire political class. But that doesn’t make the ‘deficit crisis’ story objectively true -- at least not in an economic sense -- or any less of a scam.