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Don't Succumb to Deficit Hysteria
Today, as expected, the White House announced that the deficit projections are worse than it had thought. And as expected, the same old group of deficit hystrics went ballistic. "A 10-year deficit of $9 trillion is $30,000 for each man, woman and child in the United States!" kabaam. "Public debt will total a whopping $17.5 trillion by 2019 — three-quarters of the nation's entire economy!" Kaboom. "The number would send Reagan's stack of thousand-dollar bills into satellite orbit!" Zowee.
Can we please relax? First, ten year projections are notoriously irrelevant. Remember Ross Perot? In 1992, he predicted that the federal budget deficit was on track to end to the world as we knew it. In fact, the rapid growth of the economy during the following years reduced the deficit to zero (neither Bill Clinton's famous deficit-cutting nor Republican insistence on a balanced budget was responsible; the deficit reached zero before any major fiscal changes kicked in).
Second, deficits and debts mean just about nothing anyway -- at least out of context. In 1945, the federal debt was 120 percent of the entire U.S. economy. Yeegads! Yet only a few years later, the debt as a proportion of GDP had been tamed -- and not primarily because of cuts in government spending. Yes, of course, wartime spending ended. But the big change was in the denominator of the equation. Economic growth kicked in big time, and reduced the debt as a proportion of the economy to manageable levels.
The only item worth looking at is the part of the report that predicts the government will have nearly a $1.6 trillion deficit in the fiscal year that ends this Sept. 30 -- but not because that number is alarmingly large. It strikes me as alarmingly small. I'd prefer the government run a larger deficit. With unemployment and underemployment still rising, consumers still pulling away from the malls, business investment still in the basement, and exports still dead, the federal government has to spend more -- and the deficit has to be larger -- in order to get people back to work.
Can we please relax? First, ten year projections are notoriously irrelevant. Remember Ross Perot? In 1992, he predicted that the federal budget deficit was on track to end to the world as we knew it. In fact, the rapid growth of the economy during the following years reduced the deficit to zero (neither Bill Clinton's famous deficit-cutting nor Republican insistence on a balanced budget was responsible; the deficit reached zero before any major fiscal changes kicked in).
Second, deficits and debts mean just about nothing anyway -- at least out of context. In 1945, the federal debt was 120 percent of the entire U.S. economy. Yeegads! Yet only a few years later, the debt as a proportion of GDP had been tamed -- and not primarily because of cuts in government spending. Yes, of course, wartime spending ended. But the big change was in the denominator of the equation. Economic growth kicked in big time, and reduced the debt as a proportion of the economy to manageable levels.
The only item worth looking at is the part of the report that predicts the government will have nearly a $1.6 trillion deficit in the fiscal year that ends this Sept. 30 -- but not because that number is alarmingly large. It strikes me as alarmingly small. I'd prefer the government run a larger deficit. With unemployment and underemployment still rising, consumers still pulling away from the malls, business investment still in the basement, and exports still dead, the federal government has to spend more -- and the deficit has to be larger -- in order to get people back to work.
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I am not a fan of huge deficits. However, we had a choice to make between spending money we didn't have, or having the whole world's financial stability to go ass over applecart. We have a lot of repair to do to our financial health, but not nearly as much as would have had to be done if we had done nothing. The idiots who say we just should have let the banks fail have no idea of just how ugly the world would have looked if they had.
Given two awful choices, we made the right one.
I am in the camp that believes fixing the health care system will go a long ways towards shoring up businesses and families, thus aiding in the recovery. We can work on the deficit later...
August 25, 2009 4:54 PM | Reply | Permalink
It’s all about attitude.
As many of you know I quote a lot of Eugene Victor Debs (November 5, 1855 – October 20, 1926) was an American union leader, one of the founding members of the International Labor Union and the Industrial Workers of the World (IWW), as well as candidate for President of the United States as a member of the Social Democratic Party in 1900, and later as a member of the Socialist Party of America in 1904, 1908, 1912, and 1920.[1] Through his presidential candidacies as well as his work with labor movements, Debs would eventually become one of the best-known Socialists in the United States.
http://en.wikipedia.org/wiki/Eugene_V._Debs
Not because I subscribe to the the elimination of Capitalism.
It is because the Capitalists in this country have shafted the American worker and has the attitude “ What are you going to do about it”
Our Government bailed out the bankers to save the economy. Ask the person unemployed or losing his home if the economy saved him?
The financial market was saved in order to save a Class, just not Your class.
Unless an alternative is presented to counter an attitude of “You don’t like it, tough, What are you going to do about it” The banker, wall street class will always prevail against the mainstreet class.
The Federal Reserve is the fortress of the rich, the buttress against those who want to do “something about it”
The tools to assure an attitude “what are you going to do about it”
If you get too uppity about your station in life, our monetary policy will create more unemployment. Then instead of you fighting US the protected class, we’ll keep you fighting for the crumbs, fighting amongst yourselves “|what you going to do about it”
August 25, 2009 8:07 PM | Reply | Permalink
That's true Stilli. Still, the total debt, Federal, personal, corporate, financial--all needs to come down. Debt gives me the heebie jeebies.
August 26, 2009 1:49 AM | Reply | Permalink
But nothing changed. Nothing. It's just going to happen and be even worse. I'm starting to thinkg better that it HAD gone to hell and then we could rebuild maybe responsibly. Even if that means lots of dead people, even if that includes me.
August 26, 2009 4:32 PM | Reply | Permalink
The idiots who say we just should have let the banks fail have no idea of just how ugly the world would have looked if they had.
And you know how it would have looked? We lost that argument but I would not characterize our position as idiotic. Basically, letting them fail would have meant nationalizing the largest banks, breaking them up into smaller units and selling them back to the private sector. We would have accomplished the elimination of TBTF banks. Though it seems that what was done did seem to stop the plunge, it did not deal with the main problem that caused the crisis in the first place. And now that the banks are "healthy" once again they can send their dollars and lobbyist to Washington to prevent regulations that could stop or temper these insane speculative financial bubbles.
We lost an opportunity last year to reform our finances.
August 25, 2009 5:27 PM | Reply | Permalink
We certainly agree that a huge opportunity was missed. The bankers are back to their old tricks and the regulation that could have been put in place didn't happen. Such is the power of the lobbyists. But, we aren't in a world wide horrific depression...
August 25, 2009 5:32 PM | Reply | Permalink
Given two awful choices, we made the right one. stillidealistic
I recall sitting next to Ben Bernanke at an economic conference last Fall and peeking over at his cellphone.
You may not believe it, but stillidealistic's home phone number was listed #3. I never did figure out who was #1 or #2.
August 25, 2009 8:36 PM | Reply | Permalink
While I agree we can "work on the deficit later", in the sense that an economic downturn is generally speaking a poor time to cut government spending, I think we do (eventually) need to "work on the deficit".
"Working on the deficit" would have two major prongs: First, getting our military out of Iraq, Afghanistan, and preferably Kuwait, Saudi Arabia, and several other places to boot. Second, ending the absurd giveaways to business that stifle innovation and balloon domstic spending.
That means you, agriculture subsidies and crop insurance. You too, Bush-era Medicare "reforms". You too, government guarantees of bank debt.
So while I agree that hysteria is unnecessary, the hysteria shouldn't detract from the serious message that the deficit is a long term drag on American prosperity and a rather nasty present to deliver to our children.
August 25, 2009 5:46 PM | Reply | Permalink
Well, each to his own, but I'm certainly concerned about them, and think they represent a major and fundamental problem with the American economy. It's not just the total figures that are frightening. It's the fact that Congress keeps spending money like a drunken sailor and that there doesn't appear to be any fiscal restraint of any sort operating any longer.
"Second, deficits and debts mean just about nothing anyway -- at least out of context."
Very strange thing to say for someone who is a Professor at the University of California. Are you saying that California's deficits and debts don't matter at all, and aren't having substantial effects on UC and the rest of California? I think Reich knows they are. He _must_ know; UC professors are being asked to take furloughs of several days a week, enrollment is being limited and tuition is skyrocketing. The suffering they are causing is quite serious. If you want to know what impact that deficits will have on the country as a whole in the future just look at what they're doing to California today. And a large part of California's financial problems are being caused by the enormous drain of money out of California to, guess what -- pay the federal debt.
August 25, 2009 6:20 PM | Reply | Permalink
If you look at a chart of debt as a percentage of GDP by sectors since 1952, government debt has increased less than household debt, and business debt ex financials has increased even more. But the proportion of debt attributable to the financial sector has gone from virtually nothing to the biggest part.
Moreover, the removal of caps on interest rates (what was once quaintly called usury) has led to a misallocation of resources and talant into the financial sector.
Government debt isn't my biggest worry.
August 25, 2009 6:39 PM | Reply | Permalink
Agreed, but --
What we're doing, currently, is taking unpayable debt off the private sector's balance sheet and transferring it to the government which since it owns a printing press, converts it to payable debt (although in depreciated dollars, perhaps).
The sole reason for adopting that policy is to protect bond holders who chose not to protect themselves.
Given the ultimate costs (we will have to pay interest on the deficit), is that a sound and fair practice?
August 25, 2009 8:25 PM | Reply | Permalink
Mimi I think you undermine Reich's argument that the current federal deficit is not important. Reich makes the point that the current deficit is small compared to what it was at the end of WWII when it was 120% of GDP. That debt did not have to compete with personal, corporate or financial debt, but today it does. I would also add that after the war, the US economy was the only one left standing -- the world's economic powerhouses of Japan, Germany and the UK were decimated. It was US exports and internal domestic growth without competition from those three that led to the phenomenal economic expansion. In addition the lenders of that debt was ourselves. Today we have as much debt in total as we did then, but the lenders are overseas. Not only that but we must now compete with all of these and more foreign economies to sell our goods. Any rational person should worry our current total debt load along with our current accounts deficit.
August 25, 2009 8:49 PM | Reply | Permalink
That debt did not have to compete with personal, corporate or financial debt, but today it does.
If I understand you correctly --
But it (public debt) wouldn't have to (compete) with private debt if we wrote off most of the private debt created after -- oh, say 2004.
August 25, 2009 11:54 PM | Reply | Permalink
I was saying that in 1946 the federal debt was not competing with personal, corporate and financial debt. The latter three were tiny by today's standards. Today much of that private debt is being automatically transferred to public debt. That which is not is competing with public debt. What I am saying is that the differences between public and private debt are not as important as Reich seems to be implying.
That should be clear. Perhaps I do not understand what you are trying to say.
August 26, 2009 1:42 AM | Reply | Permalink
Keeping things simple:
The increase in the national debt increases the amount of interest paid on that debt. The tax money used to pay the interest on that debt is not available for government services.
Printing money to pay off the national debt will only result in inflation and an increase in rate of interest needed borrow the money needed to keep government operations going.
Government debt is a hugh ponzi scheme. The government is borrowing money to pay off that portion of the national debt that comes due each year. The amount borrowed continues to increase as the national debt is increased. This is using current tax revenues (or borrowing) to pay off previous debts.
Bernard Madoff would be proud.
August 25, 2009 10:10 PM | Reply | Permalink
You're right, interest on the national debt is a concern. It was of the federal budget last year and will likely increase.
Sure, you can blame it on the economy and Bush, but could we deal with this sooner if possible? And what happens after Obama leaves office and another President takes charge and (somehow) makes it worse?
August 25, 2009 10:43 PM | Reply | Permalink
Why bother blaming it on Bush when Obama is increasing the National Debt even faster than Bush's worst years?
August 27, 2009 9:46 AM | Reply | Permalink
I meant 10% of the federal budget. Stupid HTML.
August 25, 2009 10:44 PM | Reply | Permalink
Once again you hit the nail right on the head Prof. Reich, but doesn't it strike you as more than a bit odd how the clear and simple to understand lessons of the depression about using spending to put people back to work fall on such deaf ears amongst the elite in our nation? I think a major contributing factor is that they really don't believe the situation is as dire as it clearly is combined with the fact that the elites don't really think it's all that important whether or not we get people back to work.
August 26, 2009 1:49 AM | Reply | Permalink