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The Weak Economy and Deficit Reduction: Deniers and Terrorists

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Source: Huffington Post

The folks making economic policy in Washington are getting ever more resistant to evidence. As we approach the sixth anniversary of the downturn with no end in sight, the nation has been treated to the perverse spectacle of our Treasury Secretary celebrating the sharp drop in the deficit.

This is a bit like celebrating a sunny day in a region suffering from drought. In an economy that is suffering from lack of demand, as is the case in the United States today, smaller deficits are bad news. They mean less demand, slower growth, and fewer jobs.

This is not a complex point. Ever since the collapse of the housing bubble, the U.S. economy has suffered from inadequate demand. The inflated house prices of the bubble era led to a building boom. They also fueled a consumption boom, as people spent based on the $8 trillion in bubble generated housing equity. The bubble generated demand disappeared when the bubble burst, leaving a gap in annual demand of more than $1 trillion a year.

The large deficits the government has run since the downturn began helped to fill part of this gap. Smaller deficits mean the government is filling less of the gap. That shouldn't be hard to understand.

When the government hires people it is directly reducing the unemployment rate. These people will also spend their wages which further increases demand. It's the same story when the government hires a contractor or directly buys goods produced in the private sector. Alternatively, when it pays out money for Social Security, unemployment insurance or food stamps, this money gets spent, adding to demand in the economy.

If Mr. Lew has some theory whereby the private sector will fill the demand lost when the government cuts spending or increases taxes, he should share it with the world. If it makes any sense at all he will surely have a Nobel Prize waiting for him in short order. After all, economists have studied this issue intensely for the last five years. The overwhelming weight of the evidence is that cutting government deficits in a downturn like the one we are seeing means less growth and fewer jobs -- end of story.



It may seem a lot to ask of a lowly Treasury Secretary, but Mr. Lew should be able to think about the economy in terms that get behind homilies on borrowing and debt that he might have gotten from his parents. An economy needs to demand to sustain growth and generate jobs. If it isn't coming from the private sector then it must come from the public sector. That means deficits.

In this context, lower deficits are bad, not something to celebrate. The people who argue otherwise should be treated with the same sort derision as global warming deniers. At this point the evidence of human caused global warming is unambiguous. Those who deny it are putting the future of the planet in jeopardy based on ignorance or some ulterior motive.

The same is the case for those pushing deficit reduction in the current economy. These people are denying jobs or full-time jobs to millions of workers. Furthermore, the weakness of the labor market ensures that most of the labor force will not be in a position to get a share of the gains from economic growth.

In addition to the outright deficit deniers, we also have the grand bargainers. Following the lead of President Obama we will refer to these people as "terrorists." The story of the grand bargainers is that they claim to recognize that we really don't need deficit reduction now. In fact, many will even argue that the economy can use larger deficits at present to boost growth and generate jobs.

However the grand bargainers insist that an agreement for additional stimulus in the present has to be accompanied by reductions in longer term spending. Their focus is invariable on cuts to Social Security and Medicare. Their position is that the country's seniors, who have a median income of less than $20,000 a year, are living too well.

The grand bargainers are prepared to allow for some additional stimulus, leading to growth and jobs now, but only in exchange for reducing the benefits that provide security for the country's workers in their old age. This is where the terrorism comes in.

The grand bargainers are effectively insisting that they will keep millions of innocent people out of work or under-employed until they get a commitment to cut Social Security and Medicare payments.

This means that not only a current generation of workers will suffer from an economic policy designed to keep them unemployed, but their children will suffer as well. The unemployed will be less well-situated to raise their children and ensure them the same sort of opportunities as middle class families with stable jobs. But economic terrorists care little about their innocent victims.

Anyhow, that's the state of play in Washington. Almost all the people in either party who are taken seriously in the current budget debate can be put into either the denier or terrorist camp. Take your pick.

 

Dr. Dean Baker is a macroeconomist and Co-Director of the Center for Economic and Policy Research in Washington, D.C. He previously worked as a senior economist at the Economic Policy Institute and an assistant (more...)
 
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