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Deja vu all Over Again.

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The recent kerfuffle around the deficit is mindboggling on many levels. For instance, it's deja vu in terms of the recession and the deficit, and in terms of the current climate of distractions and dissembling, which led to a place where America did not need tread--on the plane of credit downgrade.

There are two significantly adversarial forces that seemingly moved toward convergence at this time in America's history--(1) the colossal recession of 2008 (including the sluggishly "rebounding" economy), and (2) the ongoing (persistent) electioneering for the highest office of the land, both by the current incumbent and by the slew of candidates slinging mud at their opponents, and in some (or one case) instances carpet bombing them--with obscene amounts of money, courtesy of the Supreme Court ruling on Citizens United. This will come to a head in November 2012. For now, however, the economy is mending, albeit slowly, but mending nevertheless. This is good because the number (in the neighborhood of 12.8 million) of Americans unemployed and seeking work is high. There is no need to elaborate on this latter data because deep down in the core of everyone's thoughts there is a clear understanding of what it is like to be without a job--from personal experience or from just knowing a friend or relative who is unemployed.

Elections matter because presidents nominate justices to the Supreme Court. The nominations made in the past decade have had major consequences, one of which is the Supreme Court's Citizens United ruling. My initial reaction was this is a bad thing. It seems as if the Court is coming up to speed in recognizing it might have over reached here. It was a way around campaign financing laws by making corporation persons, invoking 1st amendment freedom of speech provisions; asserting money is speech, and thus allowing corporations (unions, too) to spend unlimited sums on candidates. This allows Super PACs to bundle large sums money from anonymous donors (some quite wealthy) to finance negative ads against their opponents, so long as the Super PACs are acting on their own and not in collusion with the candidates. This is just a façade of independence that fools no one. Perhaps that's why President Obama could not return comedian/satirist Bill Maher's $1 million to pro-Obama Super PAC, Priorities USA Action despite clamors for him to do so.

What I find astonishing is that very smart people, with academic credentials sticking out of their ears, are unable to appreciate the unintended consequences of their rulings. Perhaps, there's a reservoirs of stoicism in the persona of politicians that make them party to ambiguities without remorse. They claim independence from Super PACs when they are not; when they run on jobs but rule on budgets; when the Patient Protection and Affordable Care Act becomes the pejorative Obamacare; where Romneycare is not equal to Obamacare; where Death Panels are the construct of whim; and estate tax becomes death tax. Thus, with justification we've come to expect politicians inhabit an Orwellian world.

Elections matter. In recent history, the election of 2000 gave us the Patriot Act (2001) of course in response to 9/11. The election of 2008 gave us Obamacare to address the issue of 50 million Americans without health insurance. The 2010 mid-term election cleared with path for gridlock and the fiasco of America's credit rating downgrade around the issue of the deficit and balanced budgets.

In today's shrill demand for small government we can hear echoes of President Hoover's "rugged individualism". In the election of 1928 we got the Reconstruction Finance Corporation that financed the construction of the Golden Gate Bridge, and the Hoover Dam. But we also got Smoot-Hawley Tariff Act of 1930, which was the largest tariff hike in U.S. history. This did two things at once--it protected U.S. industries from foreign imports, but it also reduced U.S. trade to other countries. The net effect of this hurt the U.S. economy. Failing to understand the enormity of the depression, President Hoover motivated by a belief in a balanced budget did two things that we, the wizened people we are, would not do today--raise taxes and cut government spending in a recession. Really? Won't we!

Around the country, a clique of relatively newly minted republican governors has been embarked on a frantic rampage to balance their state budgets. This is not a display of special courage: they have constitutional amendments that mandate this anyway. But they (and the U.S. Congress) have tried to achieve balanced budgets by reducing spending on skills and ability generators such as education, health (Medicaid, and Medicare); and in a quizzical kind of way they have tried to cut funding for Planned Parenthood, EPA, NPR, PBS, the National Endowment for the Arts, foreign aid, which is a small tranche of GDP. They have taken on unions, too; and engaged battles on contraceptives and abortion. Cutting spending in bad times is counterintuitive and counterproductive even under the pretext of balancing the budget. This is Hoover redux (in 1931). On the other hand, his budget balancing approach included raising taxes. 

The shortsighted problem here is that higher taxes in a recession tend to exacerbate the recession by inhibiting people's efforts to boost the economy. Maybe, republicans get it right when they ask for tax cuts. But it is not clear to me that they want it for the right reasons. In a recession such as we have now (out of which we are groping ourselves), business tax cuts will not increase spending in the face of high unemployment. Why produce more goods if there is nobody to buy the additional output? However, a tax cut on consumers would give them an incentive to shop, which would be good for business. At the risk of stubbing my toes on the quagmire of class warfare, I'll note in passing that rich people and poor people are not the same. 

Rich people don't need to worry about lots of things: the next meal, the high price of gas, their mortgage (except if they will beyond their rich means); tuition for their kids, health insurance, etc. Poor people have all of these and more to worry about on a daily basis. To unfetter the poor from the government is to assume rugged individualism, charities, or the church would breach the financial gap and rescue them. The poor are too monumental a task for any of this to make a significant dint on their lives by way of meeting their needs for basic necessities like food, shelter, and clothing. In another crucial way, the poor and the rich are different. They address needs differently. 

The poor have needs that require immediate attention--hunger for example. So, redistribution of income in the Robin Hood sense is a win-win proposition, but not the reverse. Why? Because if you were to take a dollar from a wealthy person and give it to a poor person, the poor person is going to spend it. The rich person(s) would hardly be expected to cut back on consumption for the loss of a dollar. The net effect: consumption (i.e. spending) rises, which is a positive for the economy. 

There are some legitimate concerns about this--but they tend to be ideological. President Hoover worried that federal aid to individuals would stifle initiative and create dependency--this sounds like rationale of advocates of spending cuts and balanced budgets. Like the rich versus the poor, bad and good times are not the same. In good times, income is rising (with low unemployment), so government tax revenues are greater, while government spending is lower--unemployment compensation, and food stamps outlays fall. This means the government deficit shrinks. So even if the government does nothing, if all the conditions are the same, the deficit would get smaller. 

The reverse of this holds up in bad times. Because of high unemployment, federal government receipts decline, and unemployment compensation and food stamps payments rise, leading to a rise in the government's deficit. The Bush tax cuts and the Obama $787 economic stimulus package were appropriate measures for this recession because the focus had to be on job creation and economic recovery--not on balancing the budget.

The lessons of history are often too soon forgotten. In the 30s in many ways the government got it wrong in dealing with the bad economy--fostering higher taxes and tariffs. Back then elections mattered. And now too elections matter because they put in office people whose ideological motivations get legislated into law. With Citizen's United the Supreme Court gave politicians carte blanche to raise huge sums of money to spend on campaigns. Also, the midterm elections of 2010 led to legislative activities that not even the most astute political observers saw coming. 

The result: what got cast aside were well-established economic theories, which argue for stimulus spending for dealing recessions. Some policymakers loose sight of the core problem--the high level of unemployment that denies people incomes (wages and salaries) to spend on goods firms produce. Instead, states cut spending and fired thousands of state workers, all of which appears counterintuitive.

I conclude with this question: In the near term what is more important a balanced budget or economic growth, which in the long term has the potential to improve the budget and the national debt? I leave the answer to you.

 

Seymour Patterson received a Ph.D. in economics from the University of Oklahoma in 1980. He has taught courses and done research in international economics and economic development. He has been the recipient of two Fulbright awards--the first in (more...)
 

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