Scaring the Political Wits Out of Us: How Important Is the Federal Deficit?

Dec 3, 2013

Scaring the Political Wits Out of Us: How Important Is the Federal Deficit?

          Last October, Tea Party activists held the federal government hostage, shutting down a good chunk of the federal government and threatening to force the U.S. Treasury to default on federal bonds. In response, our political parties demonstrated their political courage by temporarily delaying that manufactured financial crisis, simply “kicking the can down the road” a couple of months. Come this January and February, the Tea Party and rightwing allies in the Republican Party again plan to take the federal government hostage to force their minority agenda on the rest of us.

          This economic blackmail by the minority Republican rightwing is possible only because of false and misleading assertions about the supposed dangers associated with the federal deficit. It is worth reviewing these again since, after New Year’s, we will be plunged into “de javu all over again,” a cruel groundhog day revisiting of what we have just been through.

          First, the federal deficit is not ballooning; it is dramatically falling. As the economy has been recovering, tax revenues flowing to the federal government have increased and the emergency economic stimulus programs have ramped down.  As a result, the deficit has declined dramatically to less than half of what it was at the peak of the Great Recession. Federal spending is supposed to increase to support household spending and American businesses during the worst of an economic downturn and then, as unemployment declines and payrolls rise again, federal spending and the deficit decline. Such counter-cyclical federal spending helps stabilized the economy across the inevitable business cycles.

          Second, that temporary spike in the federal deficit  during the Great Recession did not undermine the strength of the dollar. Inflation has been low and the dollar has increasingly been the preferred currency that the rest of the world uses to store its wealth. From the point of view of the rest of the world, the dollar is the most reliable currency available. Gold prices have been tumbling compared to the dollar.

          Third, the federal deficit is not some horrible burden on future generations. During World War Two, the federal government ran up huge deficits compared to the size of the U.S. economy at the time to fund that war effort. The years following the war were years of expanding prosperity. Does anyone remember the generations following the war complaining of the horrible burden on them and their children of paying off the financial cost of financing World War Two? The costs of lives lost and veterans crippled were real, but the deficit that financed that victory did not burden future generations.

          That is because, when the federal government borrows, all it promises is that it will return those dollars with the promised interest at some future date. But it is the federal government that creates those dollars in the first place. It cannot run out of them. Of course, if it creates too many dollars, inflation will undermine the value of the dollar. But run-away inflation certainly does not threaten now and hasn’t burdened the economy over the last several decades. The worry during the Great Recession and the slow recovery has been that deflation, falling prices, were threatening the economy, not inflation.

          Fourth, the size of the federal deficit has to be judged against the size of the overall economy.  Currently the deficit is at about the same level as a percentage of the total economy as it was during the Reagan and George W. Bush administrations. As the deficit grew during those years when Republicans were in power, Republicans preached that deficits were not really much of an economic problem. Apparently, it is only similarly-sized deficits relative to the overall economy during Democratic administrations that matter. That suggests that the relative size of the deficit is a political football, not an economic problem.

          As a percentage of the annual economic output of the economy, bi-partisan estimates of future federal deficits indicate that they will shrink to only a fifth of what they were at the peak of the Great Recession in the last year of the Bush Administration and the first year of the Obama Administration. Normal growth in the U.S. economy will reduce the deficit to levels not seen since President Clinton balanced the budget in his last term in office.

          Europe has proved that austerity programs aimed at ruthlessly cutting government spending during a fragile economic recovery simply undermines household and business spending, sabotaging economic vitality and plunging the economy back into stagnation or recession.

          It is not public spending that threatens American economic vitality. It is under-spending on repairing and replacing the public infrastructure that supports private economic activity and prosperity.

          The right-wing Tea Party fringe will again try to blackmail us into shooting ourselves in the foot rather than rebuilding a productive and sustainable economy that shares prosperity more equitably among all of our citizens.  We need to be ready, once again, to voice an emphatic “No!” to that minority’s angry economically destructive political antics.