What the GOP and Corporate Media Are Hiding: The Public Debt Is Putting More Cash in Your Pocket
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OK, So How Do Deficits Affect the Economy?
Let us consider two dueling narratives, one for which there is no real-world evidence at this time, and another one that can be demonstrated empirically.
The first is the deficit hysterics' dark warnings that high deficits will push interest rates up, making it harder for companies to borrow money to expand and ultimately costing the economy jobs. This is known as “crowding out” private investment, and it may be the case in certain circumstances. But, as economist Jared Bernstein notes, it's “not a plausible story with excess capacity, the Fed funds rate at zero, and companies sitting on cash that they could invest with if they saw good reasons to do so.”
We've run high deficits in the past couple of years, but as I noted a few weeks ago, the Fed's discount rate -- the interest charged to financial institutions -- now stands at 0.75 percent while a year ago, it was … 0.75 percent. The prime rate -- the basis for setting the amount of interest charged for mortgages and consumer credit -- stands at 3.25 percent. A year ago, it was 3.25 percent.
Economist Paul Krugman put it a different way, noting that the interest paid by Germany, which is running a deficit equal to 3 percent of its economic output is essentially the same as what we're paying with a deficit equal to 10 percent, and also similar to that paid by the UK, which has a deficit similar to our own but has launched a panful “austerity” program.
A more realistic narrative, demonstrated repeatedly since at least the Great Depression, is that when the economy is in a hole and consumers are tapped out, spending public dollars – and running deficits in the short term – minimizes the pain felt on Main Street. Cutting spending, as the deficit hawks want to do, simply increases the hardship.
Bernstein points out how this dynamic is playing out in the states, where spending cuts have led to the loss of 300,000 public sector jobs, which is creating a drag on growth. All of those people will have less money in their pockets to buy goods and services. Some will miss mortgage payments or face foreclosure, their personal debt will increase, and all of that leads to less demand overall – a vicious cycle if ever there was one.
What Else Could the Media Be Telling Us?
Journalist Sally Kohn pointed out this week that the U.S. has a debt-to-income ratio far smaller than most corporations, a fact that is as rarely reported as the deficit's downward projections. We have a dollar in public debt for each dollar we're taking in as a nation, while companies like IBM and Caterpillar are running debts four times their incomes, and JP Morgan Chase has borrowed 50 times what it makes in a year. Corporations are fine with that, as their debt represents investments that will pay off in the future, and we should be similarly content to invest in infrastructure, education and keeping the economy growing – it'll also pay off down the road.
But perhaps the biggest distortion in our discourse on deficits is the idea that, like fungi, they just grow naturally rather than arising as a consequence of policy choices made by our representatives. As I've written before, we don't have a structural economic problem called a “deficit.” Aside from the recession, we're running high deficits now for three reasons.
First, we're under-taxed – after endless rounds of tax cuts, the federal government brought in the lowest amount of revenue last year since 1950. Second, we have a ripoff of a health-care system – if we spent the same amount per person for health care as any of the 35 countries with longer life-expectancies we'd be looking at large budget surpluses in the near future. And, finally, we spend a wildly disproportionate amount on our military. As economist Dean Baker notes, the dreaded “Medicare gap” is equal to just one-fifth of the increase in our military spending since 9/11.