Why Progressives Shouldn't Fall For the Deficit Reduction Trap

[Better Believe It]

Why Progressives Shouldn't Fall For the Deficit Reduction Trap
The fetish of long-term deficit reduction is politically poisonous -- and economically pointless. In reality, we need big budget deficits. We need them now -- and down the road.
By James K. Galbraith
Alternet
January 26, 2010

Now, when our civil rights leaders speak of deficits, no one supposes they do so from deep conviction. It's a political move. They are intoning phrases calculated to lend a tone of respectability to a larger and more important cause. That cause -- in this case protecting Social Security and Medicare from predators on Wall Street -- is a good one. But good political purposes don't guarantee good economics. And, let me argue, if the economics are based, as they are here, on a false premise, then you can't make the politics work in your favor.

The CAF (Campaign for America's Future) coalition concedes that "long-term deficit reduction" is vital. But why? No reason is given. Are they worried about a threat of inflation? If so, why not look at interest rates? Last December's average 20-year Treasury bond rate was 4.40 percent -- lower than it was before the crash sent deficits soaring. Clearly, the markets aren't worried -- or the government would have to pay more to borrow. Equally obviously, the markets aren't worried about "default" or "national bankruptcy" either. Investors know those concepts don't apply to the government of the United States.

And once you concede that deficits are actually bad, you're boxed in. If you exclude Social Security and Medicare, there is no way to cut deficits seriously (short- or long-term, on unchanged economic assumptions) except by slashing the Pentagon or by raising taxes. If you had to do something, I agree, those would be better moves. But good luck. It's not a political battle one can win.

CAF leaders try to escape the box by arguing that deficit reduction should be "long-term" -- but that we need more "up-front" spending, stimulus and investment for now. But Social Security's enemies are playing for the long term. So long as they can put Social Security and Medicare on the path to destruction over time, they'll be happy -- and quite willing to make some "short-term" concessions to reach that goal.

So the fetish of long-term deficit reduction is politically poisonous -- and economically pointless. In reality, we need big budget deficits. We need them now. We need bigger deficits than we've got, to stabilize state and local governments and to provide jobs and payroll tax relief. And we may need them for a long time, on an increasing scale, and in the service of a sustained investment strategy aimed at solving our jobs, energy, environment and climate change problems. To pretend that expansionary policies are needed only for now, gives all this away.

The public deficit is just the obverse of net private savings. That is, when private credit is booming, investment exceeds saving and deficits tend to disappear. That's what happened in the 1990s. When credit collapses, deficits return. That's what's happening now. Large long-term deficits will occur, or not, depending only on whether we succeed in generating a new growth cycle, financed by the expansion of private credit. Policies to cut spending or raise taxes -- now or for that matter in the future -- contribute nothing to this goal.

Please read the full article at:

http://www.alternet.org/news/145401/why_progressives_shouldn%27t_fall_for_the_deficit_reduction_trap