Here’s a series of posts in the next couple days to try to help voters and everybody else cut through the nonsense, lies, garbage, and con games that has become American electoral campaigns – at least with respect to economics. A lot of electoral campaigns have increasingly come to resemble common con games such as 3-card monte.
“It’s Time to Cut the Deficit” – NO, it’s not!
A lot of candidates, in fact most of them, are claiming that it’s time for government to cut it’s deficit. Tip offs: These candidates claim loudly that “Washington (or spending) is out of control”. They claim that if we only elect them, “fiscal responsibility” will return. Don’t fall for it. It’s a con.
It’s bad policy.
First off, cutting the deficit right now and making it a priority is the WRONG thing to do. It won’t help the economy. It will make things worse. Always does at a time like this with unemployment stuck near 10% and real growth at a crawl. Even the very conservative and austerity-favoring International Monetary Fund agrees, as Christina Romer notes in the NY Times:
Now is not the time. Unemployment is still near 10 percent in the United States and in Europe. Tax cuts and spending increases stimulate demand and raise output and employment; tax increases and spending cuts have the opposite effect. This is a basic message of macroeconomics and a central feature of public- and private-sector forecasting models. Immediate moves to lower the deficit substantially would likely result in a 1937-like “double dip” as we struggle to recover from the Great Recession.
Some advocates of austerity argue that, contrary to the conventional view, fiscal tightening now would lower long-term interest rates and improve confidence so much that the impact could be positive. But an ambitious new study in the World Economic Outlook of the International Monetary Fund confirms that fiscal consolidations — that is, deliberate deficit reductions — typically reduce growth substantially.
The study considers a wide range of advanced economies over the last three decades, so it doesn’t put too much weight on unusual episodes or focus on examples supporting particular conclusions. It also breaks new ground by looking specifically at times when governments changed taxes or spending with the aim of reducing deficits. Previous studies looked at summary measures of the budget situation, and likely included cases when strong economic performance caused lower deficits, not the other way around.
The recent experience of countries already carrying out austerity measures is consistent with the central finding of the I.M.F. study. Ireland, Greece and Spain have all had rising unemployment after moving to cut deficits.
If you are worried about the deficit and want to see the government move toward a balanced budget, then growth and improved employment is the only proven way. Growth naturally leads to lower deficits as the automatic stabilizers (progressive tax rates, unemployment comp, etc) automatically cut spending and raise $ of taxes collected. Personally, I don’t think deficits are a problem anyway unless they are increasing when the economy is at full employment (see my posts on MMT here). But either way, increasing the deficit now will only make unemployment rise further and depress aggregate demand. Businesses do not hire and expand when the economy itself is not growing or looking to grow.
Candidates who claim they will cut spending never tell you how they plan to do it. They are full of talk about “detailed reviews” and “improved efficiency” and such. But they never tell you how or what programs will be cut. Government budgets aren’t secrets. They’re public information. If they can’t figure out even a few specifics in the two years that they’re campaigning, why in the world would you think they’ll find it on the job when they’r busier? The reality is they don’t intend to cut anything. At the federal level, they never do. They may privatize some functions so as to enrich cronies (while lowering services). At the state level, the only cuts they propose are those that they don’t dare mention before an election, such as cutting education, police, fire, highways.
Another trick they use is to count on voters not knowing the difference beween million (1 with 6 zeros), billion (1 with 9 zeros) and trillion (1 with 12 zeros). They may cite a few instances where the federal government apparently “wasted” 2-3 million dollars (although closer scrutiny rarely shows the waste) and claim that eliminating these items will save the hundreds of billions needed to balance the federal budget. The math just doesn’t work, but they count on you not being able to do 4th grade math.
Typically what such folks do once in office is to not “cut spending”, but rather to cut taxes. In particular, they cut taxes on high-income folks, capital income (as opposed to wage income), and business taxes. This, of course, only makes the deficit worse. They have a con game for that too, but that’s another post.