Paul Krugman takes aim at something that should have been a major talking point for progressives, even if lawmakers couldn’t touch it, for the last four years. There has been a void in talking about the budget deficit in real terms, in what it’s composed of and what it really means.
First of all, to say that “we have a budget deficit” is no different than saying “we’re in the middle of a recession.” The correlation between deficits and economic growth is very tight, as you can see above. A large part of deficits are composed of reduced tax receipts from less people working, and increase in utilization of automatic stabilizers like unemployment benefits, Medicaid and food stamps, which recedes in better economic times.
Krugman puts some numbers to this:
The first thing we need to ask is what a sustainable budget would look like. The answer is that in a growing economy, budgets don’t have to be balanced to be sustainable. Federal debt was higher at the end of the Clinton years than at the beginning — that is, the deficits of the Clinton administration’s early years outweighed the surpluses at the end. Yet because gross domestic product rose over those eight years, the best measure of our debt position, the ratio of debt to G.D.P., fell dramatically, from 49 to 33 percent.
Right now, given reasonable estimates of likely future growth and inflation, we would have a stable or declining ratio of debt to G.D.P. even if we had a $400 billion deficit. You can argue that we should do better; but if the question is whether current deficits are sustainable, you should take $400 billion off the table right away.
That still leaves $600 billion or so. What’s that about? It’s the depressed economy — full stop.
As he points out, a full economic recovery would increase revenue by $450 billion and reduce spending by $150 billion. And that’s your deficit.
This should, but never does, inform budget talks. In fact, Republicans internalize this point when it suits their real desires. The whole point of “dynamic scoring” is that economic growth produces more tax receipts. Therefore, in the GOP vision, cutting taxes automatically increases economic growth, leading to that tax boost. That’s where their plan runs off the rails – there’s no actual evidence showing a uniform relationship between tax cuts and growth. But the idea of growth and recovery increasing tax revenue is self-evident – and it’s why any deficit discussion, if you want to have one, should begin and end with HOW TO INCREASE GROWTH. Of course, that only makes sense if the goal of this whole fiscal slope negotiation was to reduce the deficit, which it isn’t: it’s to intimidate people into weakening the social safety net to allow for as many tax cuts for the rich as possible.
But don’t take my word for it that a trillion dollar deficit doesn’t matter very much. Take the word of John Makin of the American Enterprise Institute. We have different perspectives, but we arrive at the same place:
The tactic of threatening to go over the fiscal cliff will fail … because deficits have been, and will continue to be for some time, eminently sustainable. The Chicken Little “sky is falling” approach to frightening Congress into significant deficit reduction has failed because the sky has not fallen. Interest rates have not soared as promised… Two percent inflation means that the real inflation-adjusted cost of deficit finance averages –1.5 percent [...]
The United States Is NOT Greece … The hyperbolic claim that the United States is becoming Greece because of the absence of dramatic progress on deficit and debt reduction is unfortunately ridiculous.
Makin takes a reality-based approach to the deficit, which probably will earn him a reprimand at best from the conservative movement. He could take the next step and say that a real -1.5% cost of deficit financing presents an excellent opportunity to borrow to fund infrastructure needs that the country will have to pay for down the road anyway.