Deficit Scare Talk Is a Big Scam by Corporations and Right-Wingers; The Problem Is Not Enough Good-Paying Jobs
The Great Recession doesn’t exist in Washington, DC. Six of the 10 wealthiest counties in the U.S. are in the DC metropolitan area, and according to Gallup’s Economic Confidence Index, citizens of the nation’s capitol are the most optimistic in the country, far more positive about the economy than the rest of America. It’s understandable -- the private sector simply isn’t hiring; public spending has averted a second Great Depression, and the spigot is located in the District.
The immense economic pain the majority of working Americans are suffering is seemingly unimportant to our political and media elites. It’s the best explanation for their callous and incomprehensible focus on a distinctly long-term deficit problem, while they shamefully abdicate the duty they owe their constituents to do whatever must be done to address a profound crisis in our labor market -- the worst jobs picture since the Great Depression.
At the same time, the stimulus funds that helped stave off a complete economic meltdown are drying up, and there’s little taste for an additional package in the halls of power in Washington. While Democrats and Republicans dither over the budget and argue over extending the Bush tax cuts, economist Paul Krugman wrote that “the real danger” we face is that “those in power, rather than taking responsibility for job creation, will soon declare that high unemployment is ‘structural,’ a permanent part of the economic landscape — and that by condemning large numbers of Americans to long-term joblessness, they’ll turn that excuse into dismal reality.”
There is evidence that it’s already happening. Almost half of the unemployed have been out of work for at least six months. The average length of unemployment is now 26 weeks, a figure twice as high as the previous record set in 1983. Economists talk about “hysteresis in unemployment” -- a scenario in which those without jobs become unemployable. After a prolonged period of joblessness, they lose their skills and their confidence, and as a result, they lose their value when firms do eventually start hiring.
The Corporate Right’s Deficit Hysteria Takes Hold
As I explain in my forthcoming book, The Fifteen Biggest Lies About the Economy, today’s deficit hysteria is the fruit of a long campaign by the corporate right to make the national debt a central issue for both major parties -- what economist Robert Kuttner called a “disabling...bipartisan echo chamber on the alleged entitlement crisis.”
The basis of that campaign is politics. One thing practically everyone understands is that so-called “entitlements”—Social Security, 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 U.S. politics on the promise of cutting grandma’s health benefits. While people respond positively to the idea of limited government in the abstract, when it comes to specifics, people love big government and most, if not all, of what it does.
People want a government that will educate their children, put out forest fires, pay for their million-dollar cancer treatments, make sure that big chemical companies aren’t poisoning their water, and save them from having to eat cat food after busting their asses for 50 years in the workforce. They expect cheap student loans and meat inspections and smooth highways, and even the lowest of “low-information” voters know they’re not going to get that stuff from the private sector.
So the Corporate Right has had to frame the debate on different terms. They’ve come up with a Big Lie to do it, claiming that the United States is headed toward a gazillion-dollar deficit just around the corner, and the only way to stave off this looming budgepocalypse is to swallow the bitter medicine of “entitlement reform.”
The Heritage Foundation, for example, warns that “Social Security, Medicare, and Medicaid threaten to swamp the federal budget” and promises that the “long-term tab” for these programs works out to $40 trillion, or “$400,000 for every full-time worker in America today.”
Whether the “gap” is $38, $40 or $53 trillion, it’s always based on a 75-year projection, and it always conflates Social Security, which is on sound footing, with our public health programs, which face the specter of ever-rising costs. And here’s a key point: the assumptions that are used to make those projections are remarkably gloomy. Specifically, the Social Security Board of Trustees, which issues annual reports on the state of our public retirement program, assumes that during the next 75 years the U.S. economy will grow by half the rate of the last 75 years. That may well prove to be the case, but it’s an assumption that goes against the grain of history.
Armed with these massive and wholly unlikely numbers—projected deficits so great they tend to shock and awe the average person—the Heritage Foundation then offers us a false dichotomy: we can either A) do nothing and face certain doom; B) raise taxes, which they argue would be foolhardy given that “the United States owes much of its economic success to its policy of low taxation and low government spending” (another distortion); or, C) “rein in spending.”
Here’s the kernel of truth on which these astronomical future deficits are based: according to the Congressional Budget Office, if everything remains exactly as it is currently projected for the foreseeable future—if health spending continues to rise at the current pace, the population grows as rapidly as expected, the economy expands by the rate it is projected to grow, the tax rates remain the same and on and on, then over the next 75 years, we would be faced with a deficit of truly epic proportions.
Ordinarily, it's pointless to project budgets that far out. We’d never assume that U.S. forces would remain in strength in Afghanistan and Iraq for 75 years and project our military spending on that basis. In almost every other instance, we look at projected budgets over a 10- or sometimes 20-year window, and for good reason: the likelihood that spending, revenues, demographic changes, and economic growth would all adhere to projections 50 years from now approaches zero. Even very modest changes to any of these factors, when extrapolated over a span of three-quarters of a century, can shift the entire super-long-term budget outlook quite dramatically.
Freaking Out at the Worst Time
That’s not to say that over the long haul, large deficits aren’t a real problem -- they are. Big sustained budget shortfalls can drive up the cost of borrowing and decrease domestic investment. Big deficits can lead to inflation over the long haul, which hurts working people badly. And we have to service the debt, which comes with opportunity costs -- it’s money that can’t be spent on public programs. The Congressional Budget Office projects high deficits stretching out for the next 10 years, and eventually the issue will need to be addressed, through some combination of spending cuts and tax increases.
But none of that means that the deficit is an imminent problem that should be addressed now, in the midst of a painful recession. To the contrary, running high deficits in a period of deep economic malaise -- when public spending is holding up much of what’s left of the American economy -- is entirely appropriate, and imposing “austerity” measures at a time like this would be nothing short of bone-headed.
Especially when one considers what’s driving these deficits.
The largest factor in 2010 is the recession itself. As people were laid off, homes were abandoned and profits decreased, the taxes collected by the government have dropped dramatically. The second biggest contributors are the various recovery efforts undertaken by the feds. According to economists Alan Blinder and Mark Zandi (who are both conservatives), without these efforts, Gross Domestic Product would be 6.5 percent lower this year, and the economy would have lost 16.5 million jobs since the recession began, rather than the 8 million we’ve actually seen disappear.
The current deficit is, among other things, propping up state budgets and keeping public workers on the payroll -- which allows them to spend money. The last thing we should do is try to rein in spending in this climate. The irony is that shying away from spending money on programs that might create jobs is in fact counterproductive as far as the budget goes. As economist John Irons noted this week, "Deficit reduction and short-term job creation are not competing priorities. Job creation is needed today to ensure a strong economy and a solid tax base tomorrow: you can't reach reasonable budget targets without a strong and rapid recovery, and you won’t get a strong recovery if you pursue austerity too early." Irons proposed some common sense for Washington lawmakers that he called a “six for six” trigger: only start looking at ways to bring down the deficit after unemployment has remained at or below 6 percent for six months.
And They Want to Extend Bush’s Budget-Busting Tax Cuts?
As the graph above shows, if the Bush tax cuts are extended, they will account for the largest share of the projected deficit over the next decade. But voodoo economics has returned to the nation’s capitol in force. Faced with a lot of red ink and an economic downturn, Blue Dog Democrats are echoing the GOP’s calls to extend Bush’s budget-busting tax cuts, including those on the top-earners. Senate Minority Leader Mitch McConnell claimed, “there's no evidence whatsoever that the Bush tax cuts actually diminished revenue. They increased revenue, because of the vibrancy of these tax cuts in the economy." It’s an old and entirely false talking-point. In 2007, Time magazine’s Justin Fox sampled some conservative opinion on this dubious claim and concluded, “If there’s one thing that Republican politicians agree on, it’s that slashing taxes brings the government more money.”
Fox then followed up with a survey of what people who understand basic math were saying about this bit of conservative spin:
If there’s one thing that economists agree on, it’s that these claims are false. We’re not talking just ivory-tower lefties. Virtually every economics Ph.D. who has worked in a prominent role in the Bush Administration acknowledges that the tax cuts enacted during the past six years have not paid for themselves—and were never intended to. Harvard professor Greg Mankiw, chairman of Bush’s Council of Economic Advisers from 2003 to 2005, even devotes a section of his best-selling economics textbook to debunking the claim that tax cuts increase revenues.
More reasonable conservatives argue that “raising taxes” during a recession is counterproductive. They say that the tax cuts put "money in people’s pockets” and help stimulate the economy. But as Alan Blinder wrote in a recent op-ed, "Not all [budgetary] dollars are created equal." He and Mark Zandi estimated that a tax dollar spent on unemployment benefits or food stamps for struggling families results in $1.60 or $1.70 of stimulus effect, while the Bush tax cuts return about 35 cents on the dollar.
That figure overstates the case, however, as it includes all of the Bush tax cuts and not just those on the wealthiest Americans (which are the cuts the Obama administration would allow to expire). Blinder compared the effects of spending tax dollars in three different ways: on food stamps and unemployment, tax cuts for fat-cats earning $5 million and those targeted toward the middle class -- “someone earning $50,000 per year.”
While the immediate impacts on the budget are identical, the near-term spending impacts are not. The unemployed worker struggling to make ends meet will likely spend the entire dollar right away. The $50,000 earner probably will spend the lion's share of it, saving just a bit—that's what most Americans do. But the $5,000,000 earner probably will save most of the new-found dollar.
“Paying more in unemployment benefits offers the most spending ‘bang’ for the budgetary ‘buck,’” Blinder concluded. “Extending the Bush tax cuts for the wealthy offers the least.”
While Washington wrings its hands over the deficit and debates whether to extend the Bush cuts, the American people appear to have a better sense of priority. According to Pew, voters prefer letting either all of Bush’s cuts -- or at least those for the wealthiest -- expire by almost a 2-1 margin (58-30). Independents break even more dramatically -- 59 percent would let some or all of the cuts expire, while only 27 percent favor their extension.
So extending the cuts would be a marriage of bad policy and bad politics. But more importantly, focusing on the fiscal picture -- debating tax cuts and measures to reduce the deficit -- poses an imminent threat to working America. This recession is atypical, and if the powers that be don’t start dealing with it aggressively, high unemployment in the United States may indeed become “structural” -- the “new normal.”