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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.

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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.

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