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4 Dangerous Myths About Government Spending

We must ditch these myths and move on to the truly urgent business of a nation that is indeed on the edge.
 
 
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We’re at the edge of the cliff of deficit disaster!  National security spending is being, or will soon be, slashed to the bone!  Obamacare will sink the ship of state! 

Each of these claims has grabbed national attention in a big way, sucking up years’ worth of precious airtime. That’s a serious bummer, since each of them is a spending myth of the first order. Let’s pop them, one by one, and move on to the truly urgent business of a nation that is indeed on the edge.

Spending Myth 1:  Today’s deficits have taken us to a historically unprecedented, economically catastrophic place.

This myth has had the effect of binding the hands of elected officials and policymakers at every level of government.  It has also emboldened those who claim that we must cut government spending as quickly, as radically, as deeply as possible.

In fact, we’ve been here before.  In 2009, the federal budget deficit was a whopping 10.1% of the American economy and back in 1943, in the midst of World War II, it was three times that -- 30.3%. This fiscal year the deficit will total around 7.6%. Yes, that is big. But in the Congressional Budget Office’s grimmest projections, that figure will fall to 6.3% next year, and 5.8% in fiscal 2014. In 1983, under President Reagan, the deficit hit 6% of the economy, and by 1998, that had turned into a surplus. So, while projected deficits remain large, they’re neither historically unprecedented, nor insurmountable.

More important still, the size of the deficit is no sign that lawmakers should make immediate deep cuts in spending. In fact, history tells us that such reductions are guaranteed to harm, if not cripple, an economy still teetering at the edge of recession.

A number of leading economists are now busy explaining why the deficit this year actually ought to be a lot larger, not smaller; why there should be more government spending, including aid to state and local governments, which would create new jobs and prevent layoffs in areas like education and law enforcement. Such efforts, working in tandem with slow but positive job growth in the private sector, might indeed mean genuine recovery. Government budget cuts, on the other hand, offset private-sector gains with the huge and depressing effect of public-sector layoffs, and have damaging ripple effects on the rest of the economy as well.

When the economy is healthier, a host of promising options are at hand for lawmakers who want to narrow the gap between spending and tax revenue. For example, loopholes and deductions in the tax code that hand enormous subsidies to wealthy Americans and corporations will cost the Treasury around $1.3 trillion in lost revenue this year alone -- more, that is, than the entire budget deficit. Closing some of them would make great strides toward significant deficit reductions.

Alarmingly, the deficit-reduction fever that’s resulted from this first spending myth has led many Americans to throw their support behind de-investment in domestic priorities like education, research, and infrastructure -- cuts that threaten to undo generations of progress. This is in part the result of myth number two.

Spending Myth 2: Military and other national security spending have already taken their lumps and future budget-cutting efforts will have to take aim at domestic programs instead.

The very idea that military spending has already been deeply cut in service to deficit reduction is not only false, but in the realm of fantasy.  The real story: despite headlines about “slashed” Pentagon spending and “doomsday” plans for more, no actual cuts to the defense budget have yet taken place. In fact, since 2001, to quote former Defense Secretary Robert M. Gates, defense spending has grown like a “gusher.”  The Department of Defense base budget nearly doubled in the space of a decade. Now, the Pentagon is likely to face an exceedingly modest 2.5% budget cut in fiscal 2013, “paring” its budget down to a mere $525 billion -- with possible additional cuts shaving off another $55 billion next year if Congress allows the Budget Control Act, a.k.a. “sequestration,” to take effect.