Download November 22, 2010

November 21, 2010
KUFM / KGPR
T. M. Power
Resisting the Deficit Hysteria
Magical thinking and fear mongering have managed to whip up a political
hysteria that focuses on current federal deficits as the greatest threat to the American
economy and way of life. From the Tea Party’s agenda to Obama’s National
Commission on Fiscal Responsibility and Reform to the Bipartisan Policy Center’s Debt
Reduction Task Force, the drum beat is the same: The most important economic policy
we need now is one that slashes government programs across the board, so that we
can quickly bring government spending drastically down and into alignment with current
shrinking tax revenues.
The chief economic objections to deficit spending are two-fold: When the federal
government prints money to purchase goods and services, it puts upward pressure on
prices, potentially triggering rounds of inflation that reduce the value of the dollar. “Too
much money chasing too few goods.”
The second is that the government, in borrowing the money, competes with
private businesses, squeezing out productive private investment and driving up interest
rates. That slows the growth of the economy.
In evaluating these objections as current threats to the economy, simply ask
yourself whether there is currently too much money chasing too few goods or, in fact,
the opposite: Consumers not willing to buy what businesses are producing? Also ask
yourself: Are interest rates rising? Is it government borrowing that is keeping private
business firms from investing? Or is it that businesses are not investing because
consumers are not buying and because banks and other financial institutions are not
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lending to businesses because they still have toxic assets on their books from the
speculative excesses of that past that makes them fear for their solvency?
Inflation as measured by the consumer price index was actually negative, that is,
prices actually fell, from 2008 to 2009, for the first time in over a half a century. So far
this year, prices have risen by less than one percent, far below the 3 to 4 percent
annual increase in prices that have characterized inflation for the last 30 years. The fear
of most economists and bankers is deflation and depression, not inflation.
Of course interest rates also are not being driven up by federal deficits: Short
term interest rates are near zero and longer term interest rates are at low levels not
seen for more than half a century. Clearly the current federal deficits are neither driving
up prices nor driving up interest rates. There is little likelihood that anything of that sort
will happen until the millions of unemployed Americans are put to work along with the
rest of the productive capacity of our economy that is also sitting idle.
Large federal deficits are economically corrosive when the economy is
expanding, when the nation’s private productive capacity is approaching its limits, and
the nation’s workforce is nearly fully employed. Then those deficits can cause
accelerating inflation that wreaks havoc on all of us and drive interest rates ever higher,
squeezing out the investment that is needed to allow the economy to continue to
expand. The deficits run by Republican Administrations even while the economy was
expanding briskly could be faulted on these grounds and the surplus the Clinton
administration generated at the end of the economic boom of the late 1990s could be
praised as the appropriate fiscal policy for boom times. But to slash government
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spending at the same time demand destruction has swept the private economy would
be to amplify a negative economic feed-back loop.
Our dominant economic problem right now and for the foreseeable future is high
unemployment, reduced worker earnings, economic insecurity, and the accompanying
inability of households to support the nation’s factories and businesses. That, of course,
discourages businesses from rehiring and banks from lending. And so we sit with the
economy largely stalled. The economy is slowly expanding but not at a rate that is
putting people back to work or, even, absorbing the new entrants into the workforce.
That is what we need to be focused on. Much of the current federal deficit is not
tied to out-of-control federal spending but to declines in federal tax revenues as
household incomes and business profits have tumbled downward while demands for
government services to support those out of work and plunged into poverty have
increased. If we cannot recreate the demand that puts people back to work at decent
wages, we are unlikely to be able to do anything serious about the deficit. That is why
the current focus on the deficit rather than on unemployment is economically perverse.
Cut-backs and lay-offs by state and local governments who cannot run deficits
have already offset a substantial part of federal stimulus spending and those state and
local governments will continue to do so as they wrestle with falling tax revenues. For
the federal government to join the deficit hysteria and, in the name of “austerity,” layoff
hundreds of thousands of its own workers while slashing spending and forcing the layoff
of even more people in private businesses, schools, and other non-federal government
operations will just add to the downward economic spiral.
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A substantial portion of our work force is out of work not because of the federal
deficit. Rather, we have federal, as well as state and local, government deficits,
because people are out of work, families are hurting, and the demand for the goods and
services our businesses stand ready to produce has disappeared. We have got to stay
focused on job creation and not get lured off into tilting at the latest ideological
windmills.
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