There Is An Efffective Way to Reduce Government Deficit: Employment. But They Won’t Take That Route.

In the whole crazy, unnecessary debate over raising the debt-ceiling law, politicians, reporters, and commentators all spoke as if there were only two ways to reduce the government deficits.  Nearly everyone took it as an article of “serious thinking” that to reduce a deficit requires either reducing spending or increasing taxes.  But rather than being evidence of “serious thinking”, such talk is evidence of sloppy, imprecise, and ignorant thinking.  Such talk totally ignores the role of economic growth in determining government budgets and it ignores the role of the government in the economy.  It’s evidence of the government-as-household fallacy, the idea that government is just like a big household and subject to the same constraints as you and I.

There is a way to balance the budget that doesn’t require cutting major spending programs.  And it doesn’t require big tax increases.  It’s called economic growth and putting people back to work.  The major cause of the deficit is because we have very high unemployment.  We have over 9% reported unemployment.  That number rises to approximately 16% if we count all the people working part-time jobs but that desperately want full-time work and more hours.  And finally, both numbers totally ignore the fact that since we fell into this depression in 2007 well over 5% of adult Americans have chosen to drop out of the labor force altogether for now.  If we put those people back to work, they pay taxes. Government revenues will increase even without a tax rate increase.  If we put those people back to work, then government spending on unemployment compensation, Medicaid, welfare, and a host of other safety net programs goes down.  Automatically. Without cutting any programs or harming anyone.

This idea that economic growth and full employment will reduce deficits isn’t some theoretical possibility that only exists in the models of some economists.  We’ve done it before.  Other countries have done it.  In fact, everytime the U.S. has reduced it’s deficit it’s been by increasing employment.  The route to a small deficit or even a balanced budget lies in achieving full employment first, not in contrived artificial balanced budget amendments.

It wasn’t until the debt-ceiling debate was practically finished (for now – it will be back like zombie or vampire) that any in the media took notice that growth and employment is the key.  Last Sunday, July 31, as the President and the Republican Speaker announced their deal to cut spending and raise the debt ceiling, the New York Times finally runs a decent article about how growth is the real answer (bold emphases are mine):

 We wouldn’t need any of that [reduce spending, raise taxes, inflation, or default] if we could restore economic growth. If that happened, Americans would become richer and pay more taxes. Et voilà! — we’d pay down the debt painlessly.

Crazy as that might sound, particularly given Friday’s figures, the possibility isn’t some economic equivalent of that nice big farm where your childhood dog Skip was sent to run free. There are precedents.

Before its economy crashed, Ireland was a star of this sort of debt reduction. In the 1980s, Ireland’s debt dwarfed its economy. Over the next two decades, though, that debt shrank to about a quarter of gross domestic product, largely because the economy went gangbusters.

“Ireland went from being, you know, the emerging market in a European context, to a very dynamic economy,” says Carmen Reinhart, a senior fellow at the Peterson Institute for International Economics and co-author of “This Time Is Different,” a history of debt crises.

The United States has done the same in the past, too. After World War II, gross federal debt reached 122 percent of G.D.P., the highest ratio on record. But over the next 40 years, it fell to about 33 percent. That wasn’t because some blue-ribbon panel prescribed austerity; it was because the American economy became much, much richer.

The same happened during the prosperous 1990s, which began with deficits and ended with surpluses. Former President Bill Clinton is often credited for that turnabout, as he engineered higher tax rates. But most economists attribute the surplus years primarily to extraordinarily rapid growth.

It would be lovely to repeat that experience today, and send our federal debt off to that farm with Skip…

Usually after a recession, growth snaps back quickly and the economy makes up for ground lost — and then some. That’s not the case this time, at least so far. In the 60 years before the Great Recession, the economy expanded at an average annual rate of 3.5 percent. In the second quarter of this year, it grew at less than half of that pace, putting us further and further behind where we would be if the economy were functioning normally.

Unfortunately the article still tries to give the reader the impression that growth/full employment is difficult or unlikely this time.  It tries to give the impression that the growth during the Clinton years was somehow extraordinarily fast.  It was only fast by comparison with either the Bush I, Bush II or the first Reagan terms.  In fact, the growth during the Clinton years was only average at best when compared to what was achieved routinely during 1950-1973 or even during the Carter years.  The article also falsely claims that our “aging population” will require unusually large demands on government resources.  In fact the demands of the aging baby boomers on either Social Security or Medicare aren’t any greater than the resources we devoted to educating those baby boomers in the 1950’s and 1960’s.

Nonetheless, the point of the article is right on:  growth and growth in employment is the way to go if you’re worried about the deficit & debt (which I’m not, but that’s another issue).  The deficit we have is a jobs deficit, not a fiscal or budget deficit.  That’s what we need to worry about.

Washington and the chattering political classes have it wrong.  Their “serious” talk is anything but.

7 thoughts on “There Is An Efffective Way to Reduce Government Deficit: Employment. But They Won’t Take That Route.

  1. Well, even if I would agree with basic argument that full employment could heal the deficit&debt issues, my question would be How would you do it? this is how I look at the problem. Perhaps it is primitive approach, but still… The employment requires wages. American standard of living is quite high. On one hand, people should be employed and get fair wages to keep up with living expenses. On the other hand, the output product/service that is produced within the US should be cost competitive.
    Aren’t you agree?
    As far as I know the main reason for off shoring is the labor cost and strict business regulations in the US market, because businesses are still looking for cheaper product/service in order to fill the market demand and stay competitive. With such level of the US wages and regulation it is very hard to compete.
    Therefore I would assume that to start being competitive again by producing within the US, the US has to lower living standards and so reduce wages and different kinds of regulations. I would guess that nobody would do it. Nobody will give up the life style to worse.
    And if my reasoning line is consistent (at least I’ve tried 😉 ) it clarifies why it is not feasible to do so and rather play either with budget expenses or tax increases.

    • The problem in the US, UK, and many other countries is that there is too little demand. Lowering wages will not increase employment at the macro or national level. Lowering wages only lowers people’s incomes and that reduces demand even further.
      The U.S. could easily achieve full employment through either a large scale government spending program designed specifically to generate employment or through a guaranteed jobs program. Right now the government could borrow $1 trillion for 30 yrs at a real interest rate of around 1-2%. That money could be spent to create employment. The taxes from the new employment would more than pay the interest on the additional debt and would also help reduce the deficit. It’s lack of political will that is the problem.

  2. I can’t say that I am agree, Jim.
    Yes, I know, that Government spending is one of GDP elements (GDP = Consumer Spending, Government Spending, Business Investments and Net Export). If Gov spending are increasing then more people will be employed. Agreed.
    But Gov orders should have some limitations too. I hardly can imagine if Government just for Employment sake would create more and more orders/spending and therefore keep up with decent unemployment rate. Government could spend only a certain amount of money per certain amount of needs. And if those needs are reached, it is not necessarily required to generate more spending within certain period of time.
    Otherwise it looks like socialistic approach that I remember from Soviet Union times. Gov spending was consistent and jobs were guaranteed. But what was those spending? For more and more weapons? Or some product that nobody would buy in the end of a consumption chain? It just led Soviet Union to the dead end.
    Therefore, once again I would like to say that all 4 elements of GDP should be balanced out and to rely on the Gov spending only eventually will lead the National economy to the deep troubles.

  3. “Shovel ready jobs”- fund the states fully to stop their austerity measures. They can rehire teachers, police, nurses, social workers, operate all state government offices full time etc. Fund higher education fully because that is a real investment for future prosperity. You can also start on highways and bridges etc. The fact is GDP is five times government spending and has been from 1969 to 2010. Actual data shows that with no involvemen­t of taxation and its changes over the years. You can see the data in
    This means more government spending will produce more GDP. Government spending must be creating all those jobs for the actual data to be true not withstandi­ng the “job creation myths” being talked about in the media.
    Deficits are good. Modern Money is simply like poker chips to keep the real game of economy going. Real economic resources are labor, natural resources, well educated populace, creative and enterprisi­ng people which USA used to have in abundance till the “deficit mania” took over. Massive austerity is a myth. Unemployme­nt and poor education will ruin USA if allowed to continue. Japan has more than 200% deficit with no problem.

    • You are crazy to think that a deficit is good. Do you really think that it is a good thing that our country is dependent on China buying our debt???
      China knows that we are dependent on them buying our debt, so they have manipulated their currency drive the cost of their goods down, which makes it unaffordable for American businesses to compete domestically and globally with the goods that come out of China.
      Your logic does not look at the big picture. Not only is China driving the cost of their goods down, the cost of our goods are rising because of the inflation that our central bank has created by printing money to fund our massive debt and spending to keep all of our governments programs afloat which you want to add too with some job creation initiative that will cost 1 trillion dollars.
      Why not let the private sector create jobs for 1 trillion dollars cheaper (for free). If you want to create tax revenue through job creation, jobs should be created through the private sector. That is done with less government interference with their crippling regulations and taxes.
      Job’s will generate revenue, cutting spending will reduce our 16 trillion dollar deficit, a reduced deficit will secure the future of our country and children.

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