Our Phony Budget Battles Are All Smoke and Mirrors
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Weeks of highly publicized debates - some in Congress, more in the mass media - brought Republicans and Democrats to a budget deal. To maximize public attention, they threatened a possible government shutdown. Both parties said that large government deficits and accumulated debt were "serious problems." They agreed that solving them required only spending cuts, not revenue increases. In unison, they repeated, "we" must "learn to live within our means."
In fact, both sides never actually engaged the deficit and the debt. They limited themselves to purely cosmetic, symbol-laden cuts (Republicans) and refusals to cut (Democrats). Aiming at the 2012 election, both parties used the deficit and budget debates purely to impress their voters.
Basic numbers tell the true story. The current (Fiscal Year 2011) budget spends about $3.5 trillion while receiving $2.0 trillion in tax revenues. The difference of $1.5 trillion (the equivalent of $1,500 billion) is this year's deficit. The US Treasury must borrow that from whoever will lend to the US government. After much hot air, Republicans and Democrats reached a "historic compromise," namely a spending cut of $38 billion. That will reduce this year's deficit from $1,500 billion to $1,462 billion, an economically insignificant sum. The sound and fury of Washington's debates signified nothing was to be done about the actual deficit.
Republicans pretend to be deeply troubled by huge government deficits run up in recent years. They conveniently forget why those deficits soared: (1) capitalism's crisis increased unemployment, and so, cut income tax receipts, and (2) Washington response was to borrow trillions and spend them on bailing out banks and credit and stock markets. Republicans revive their old mantra: reduce deficits by cutting "wasteful spending" and "government mismanagement," which turns out to mean the social programs they don't like. Republicans hope to cash in politically on popular upset over the crisis' costs and the government's unfair and ineffective response.
Democrats pretend to be as troubled by deficits as Republicans. They parrot Republicans in denouncing wasteful government spending and mismanagement. However, they champion fewer spending cuts than Republicans, hoping thereby to cash in politically on popular support for helpful government programs needed especially in hard times. Democrats are also loudly oppositional where that might appeal to their voters (e.g. saving Planned Parenthood from cuts).
Democrats and Republicans did not even discuss, let alone agree on, tax increases on the wealthy or on corporations as ways to cut deficits. At the same time, their proposals for cutting spending were economically insignificant. In short, the two parties' deficit-reduction campaigns were fakes.
What difference do deficits make? When the government's tax revenues fall short of its expenditures, it must borrow the difference. That borrowing adds to the country's total accumulated debt. As a result, next year and thereafter, government spending will have to pay interest on this year's borrowing. That means using a portion of its tax revenues in the future NOT to provide public services or help people, but instead, to pay interest on its borrowing this year.
Deficits matter because they divert tax revenues away from serving most taxpayers to enriching Washington's creditors instead. They also matter when Republicans and conservative Democrats use deficits and government debts as excuses to cut government programs they oppose.
Conservatives fear and oppose government economic interventions other than those that support and protect business interests. When most recessions hit, conservatives want tax cuts for business and little more. When major recessions hit, they want massive government bailouts of businesses. If those require deficits, the conservatives support them (they backed the Bush and Obama bailouts from 2008 to 2010). They only turn against deficits later, once business profits are restored and then demand cutting government economic interventions that benefit other than business interests.