Thursday, March 11, 2010

The Budget Deficit and the National Debt Are Not the Problem

We all need more schooling on economic issues

and I say it ought to happen outside the classroom. My professors of choice? Dean Baker and Mark Weisbrot, the estimable co-directors of the Center for Economic and Policy Research (CEPR). But I begin today's self-taught lesson with a quick look at "Smart Debt, Dumb Debt -- There's a Difference," a column by E.J. Dionne in today's Washington Post.

"Because we never face up to how much we need government to do, there is a pathetic quality to our discussion of big deficits," writes Dionne. I have no particular quarrel with this statement or most of the rest of his column. But I am acutely aware that any discussion of the federal budget, the national debt and huge and vital programs like Social Security are extremely contested terrain. And when we get on that ground, most of us get quite emotional.

The debt, we hear, is a direct squandering of our children's future. Similarly, extended unemployment benefits, deficit spending, even social security, are transfers of wealth from hardworking people to irresponsible spendthrifts. Universal health coverage under Obama, it is said, is a trojan horse that will expand the socialist takeover of the country. Of course, most readers of this blog do not share such extreme perspectives, but they have their doubts, I am sure. These doubts are more often expressed in the form of a belief that social security will not be there when the gen-x and millenial generations need it. Or expressed as a belief that maybe the stimulus package didn't work or, perhaps, the amount of debt held by foreign investors is dangerously high.

Such doubts make a thorough discussion of federal spending difficult at any level. They may not move moderate Democrats and independents to sign up for tea parties, but they do undermine faith in a liberal understanding of government activism, and that uncertainty is channelled by Blue Dog Democrats who turn resistance to government initiatives into a political program, which in turn contributes to the apparent futility of Congress. So when E.J. Dionne calls us to a more rational discussion of government economics, I start looking for ways to ground the debate in a broader understanding of economic reality and government alternatives; I start looking at what Dean, Mark and CEPR can tell us. Here's some of what I found during today's search:

In "America's Public Debt: The Least of Our Worries," Weisbrot observes that the 2009 stimulus package (about $1 trillion) was far too small. Even the best estimates suggest that it has saved less than one-quarter of the 8.5 million jobs we've lost since the Great Recession began. Under the circumstances, deficit spending shouldn't be an issue, he writes:
"It is clear that there is no short-term problem with running large deficits in a weak economy: investors are buying up even long-term U.S. Treasury bonds at remarkably low real interest rates. Clearly the markets do not perceive that our government is heading into risky territory with its debt. Interest payments on the debt are currently just 1.4 percent of GDP."

In fact, more deficit spending is necessary, says Baker, in "The Budget Deficit Crisis Puzzle." More aggressive government action is the only way to create the jobs we need and stabilize the economy, Baker writes, putting to rest the notion that huge current deficits will permanently cripple the economy:
"...larger deficits will put many of our children's parents back to work. Larger deficits will increase the likelihood that parents can keep their homes and provide their children with the health care, clothing, and other necessities for a decent upbringing...
In spite of the deficit hawks' whining, history and financial markets tell us that the deficit and debt levels that we are currently seeing are not a serious problem. The current projections show that, even ten years out on our current course, the ratio of debt to GDP will be just over 90 percent. The ratio of debt to GDP was over 110 percent after World War II. Instead of impoverishing the children of that era, the three decades following World War II saw the most rapid increase in living standards in the country's history."

Elsewhere, Baker argues that the millenial generation will not be harmed by paying higher taxes to support baby boomer retirees. They face other problems, he writes:
"The projections from the Congressional Budget Office, the Fed and all other standard sources show that before-tax compensation will rise on average at the rate of about 1.4 percent a year. This means that after 20 years their compensation will be more than 30 percent higher than what workers get today. This means that even if they pay substantially higher taxes than workers today, they will still have substantially higher living standards.

The retirement of the baby boomers is likely to help millennials. It will reduce the supply of labor -- creating opening higher up on career ladders -- thereby allowing millennials to get better jobs with higher pay.

The real threat to millennial living standards are:

1) inequality -- the continuation of the recent trend where more money goes to the top of the income distribution;
2) a broken health care system -- protectionists in control of policy want workers to give all their money to insurers, drug companies, medical supply companies and highly paid specialists;
3) ecological problems -- if the people in Bangladesh can make our children pay for the damage we have done to their land and lives through global warming, then our kids may be in trouble;
4) incompetent economic policy -- if geniuses like Alan Greenspan and Ben Bernanke continue to control economic policy, then they may be able to create poverty even in a world of enormous potential affluence."

I could go on, but that likely would be a cruelty to those of you who have actually read this far. But I will end by suggesting that a full discussion of how to restructure federal spending is impossible without putting military spending on the table. I've written about militarism and military spending quite a lot. The dollars involved are huge, highly wasteful in terms of job creation, and encourage destructive interventions and even more wasteful expenditures to support those interventions. In the next decade the U.S. will spend at least $1.5 to $2 trillion to pay interest on that portion of the national debt that is directly caused by past military spending. Only those people who actually believe that the North Vietnamese attacked U.S. warships in the Tonkin Gulf with gunboats, or that Saddam Hussein had weapons of mass destruction, or that billions of dollars in military subsidies to Israel have enhanced national security, can sincerely argue that we ought to keep spending more than $1 trillion on our military every year.

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