Are Deficits Good?

Are deficits good? Are they bad? Don’t they matter as Vice-president Cheney said some time ago?

Is increasing taxes good? Is increasing taxes bad? Is decreasing taxes good or bad?

My answer to all these questions is, it all depends.

By and large deficits are undesirable because they are a burden on the budget since interest must be paid on the debt, thereby placing a further burden on the budget in the form of an uncontrollable expenditure. During the last few years the payments on the debt have been the third highest item after Defense and Health and Human Resources. This year the US has paid $451 billion or almost a half trillion dollars in interest and the year is not yet ended. The National debt has gone over $10 trillion. According to the Wall Street Journal the budget deficit for fiscal 2008 will be $407 billion or more than double the deficit for 2007. In January 2004 President George W. Bush pledged to cut the annual deficit, which was $412 billion in fiscal 2004, in half within five years.

Instead as can be seen the deficit has ballooned.

McCain has pledged to balance the budget by 2012, which is probably even more hot air than Bush’s pledge was, when one considers that McCain wants to extend the tax on the super-wealthy and cut corporate taxes, as well as continue the war in Iraq. Total costs for the war from 2001-08 could top $800 billion, according to federal estimates.

It seems absurd for McCain to promise to balance the budget without ending the war, yet he has indicated a willingness to stay in Iraq for up to fifty or even 100 years, provided there are no American casualties, without ever considering the economic costs, which Joseph Stiglitz, a Nobel Prize-winning economist and self-described opponent of the war, puts at $1 trillion to $2 trillion, including $500 billion for the war and occupation and up to $300 billion in future health care costs for wounded troops.

So far the only expenditure McCain has identified for cost cutting is earmarks, which while desirable only amounts to $7.4 billion, according to Taxpayers for Common Sense, hardly an amount that would make a dent in our budget deficit.

But all these figures are simply background to my initial question are deficits good or bad. The answer is found in the economic theories of John Maynard Keynes to which I subscribe. During good economic times we should have a balanced budget. When the economy slows or goes into recession we must pump prime it and deficits are the way to do this.

To be sure when the Clinton Administration took office they inherited from twelve years of Republican misrule a failing economy and a $290 billion deficit and Clinton proposed raising taxes on the wealthy which would appear to have been the wrong prescription for a failing economy. But to a large extent the economy was handicapped by very high interest rates and Alan Greenspan then the Chairman of the independent Fed was not prepared to lower them unless the budget was in balance. Clinton correctly reached the conclusion that lower interest rates were vital to an economic recovery. His tax increase passed in the Congress on a tie vote with Vice President Gore casting the tiebreaker in favor of the tax increase. The result was a booming economy and a $100 billion surplus that was expected to quadruple in the decade ahead. Everybody was better off even the people whose taxes were being raised, because they ended up with more in their pockets after taxes than they had before the tax increase. There was even an expectation that before long the National Debt accumulated since the founding of the Republic would be wiped out. In other words a good tax increase.

The situation now is opposite. Interest rates as set by the Fed are at an all time low and so no lowering of interest rates can be effective in stimulating the economy. Therefore the only thing possible is to either lower taxes or increase spending, or a combination of the two, either of which would further increase the deficit and the debt. That is one of the main reasons that creating the deficit during a period of relative prosperity was so reckless, for it now means we need a deficit on top of an existing deficit. Whether, as McCain claims, we should further lower taxes on the rich to stimulate the economy depends on whether you are an apostle of Supply Side economics, as Bush, McCain and most Republicans are. This holds to the theory that if more money is made available to the producers in the economy they will buy more equipment, which will have to be made by others, thus creating a chain effect that will stimulate the economy. The fallacy in this theory is that no matter how much money is placed into the hands of producers, they will not increase their production capacity unless there is demand for its output. In order to increase demand, money must be put into the hands of consumers. To a limited extent this can be done by cutting their taxes, and Obama has proposed this, but the vast majority of Americans already have a fairly low tax exposure, and in a recession as more become unemployed and under-employed they have even less tax exposure. So this has a limited effect. A quicker and more satisfactory way of doing this is by directing money their way in the form of expenditures. This can be done in a variety of ways, some of which will have immediate effect and some will take effect at a later time. Thus increasing the duration of unemployment insurance has an immediate effect. Offering consumers bankruptcy protection, as corporation have when they cannot meet their debt obligations, has an immediate effect, and would ameliorate the sub-prime mortgage crisis. Lending money to states, who have lost much of their tax revenue as a result of the economic downturn would have an immediate effect, preventing the laying off of large numbers of state employees and the drastic cutting of social programs to people who can not be consumers without such aid. Somewhat slower in effect but crucial to the long term prosperity of the US economy is repairing and rebuilding our infrastructure, which has been neglected for too long, resulting in one bridge having fallen down and many others in danger of doing so. Our ports, crucial to our prosperity in a globalized economy are inadequate to the task of handling huge quantities of container cargo and the vital port of New Orleans desperately needs repair and upgrading. The US should take a leaf from the activities of the Dutch, whose port at Rotterdam is a paragon of efficiency and modernity. In a few years the Panama Canal will have been enlarged, allowing much larger container ships to ply these waters. Our ports must be ready to accommodate these greater loads.

No matter the cost, a new energy policy cannot wait. As has been pointed out we are now sending $700 billion dollars to import our energy supplies, a staggering drag on our economy even if it turns out to be half that. For us to drill our way out of it is nothing less than a myth. We do not have anywhere near enough reserves, and even if we allowed drilling everywhere, no matter what the ecological cost, it would still be a drop in the bucket, and would not come on stream for ten years or more. Nuclear energy could contribute a significant supply, but here too we are talking in excess of ten years and it is expensive. Especially now that the price of oil has come down, other forms of energy are no longer competitive. To make them competitive means giving subsidies to such alternative energy sources, which will further impact our deficit. The energy sources with the best potential are wind and solar energies, and we must be prepared to encourage their development by subsidizing their development and, if necessary, their use.

Health care reform cannot wait any longer. Our health care system is costing more and delivering less.

Reform will save enormous amounts further down the line and give people the care they need at a cost they can afford.

These and other needs of the country are not expenditures. They are investment that will repay us many times over.

One of the tragedies of ’29 was that there was orthodoxy that budgets must be balanced. We must not make that mistake again. The media seems to be fixated on this idea, and asked the candidates over and over what they would cut in view of the growing deficits. There are undoubtedly many places to cut where programs are not effective. A major saving in spending will be a dividend of the drawdown in Iraq. This drawdown may very well be the direct result of the Iraqis insisting on the end of the occupation. But the needs of our people and of our economy must be met. We cannot, we must not, cut the budget of the FDA or OSHA or toy inspections. By following policies that are consumer oriented, we will trickle the wealth upward instead of downward, and we will grow the economy, until we once again arrive at a balanced budget.

The discredited Supply side economics must see their well-deserved demise.

Iraq - Whence from Here?

In my last column I pointed out that the Democrats’ victory in this election does not assure success in the next election two years hence.

I urged Democrats to focus on the climate of corruption in Washington. They have made a good start in this area. Hastings was denied the chairmanship of the House Intelligence committee and while Jefferson will be seated, he will be denied any consequential committee assignment. All earmarks have been shelved.

The elephant in the room is, of course, Iraq. Here there have been many voices demanding that Democrats come up with a plan. The Left calls for an immediate withdrawal or at least a timetable, and on the Right there is a call for Democrats to come up with a plan for victory or the latest euphemism, “Success.”

I submit that this is not the time for Democrats to take a position as a party and to allow free discussion among its members.

I urge this because the decisions will in any case be made in the White House and the Congress can only marginally affect policy. In addition there is no good solution. Of course Congress has the purse strings but I would seriously doubt the wisdom of cutting off funds for our troops.

Furthermore, too many on the left at times sound too much like isolationists and/or pacifists and these positions are disastrous both from a policy and a political standpoint.

Not to recognize the serious consequences of a failed state in Iraq is as serious a “State of Denial” as the Administrations claim that things are going well, or that the decision to invade was wise. Of the few things that this Administration is right about is that failure in Iraq will have serious consequences.

The withdrawal of American troops will mean a heightened civil war in Iraq with enormous civilian casualties both among Sunnis and Shiites and is very likely to draw other states in the region into the conflict. The Saudis have already announced that if American troops withdraw they will go to the aid of the Sunni population in Iraq. This could draw Iran further into the conflict on the side of the Shiites, and potentially could lead to hostilities between those states. If this were to happen the Kurds might well decide it is time to get away from the mess and declare their independence. This would probably cause the Turkish Kurds to want to join their brethren, which would bring Turkey into the fray because they would not allow part of its territory to break away. Hundreds of thousands of Iraqi’s have already begun to flee their homeland to escape the violence. Such increased violence would multiply the exodus to neighboring states, particularly Sunni Jordan, causing destabilization of that nation. It is almost inconceivable that with such a scenario Syria and ultimately Lebanon would not be drawn in. The conflagration is hard to imagine. Ultimately it would cause a flood of refugees to leave the Middle East and overwhelm Europe and possibly the U.S., which could not effectively keep out desperate people.

If anyone thinks that such a conflagration, or even a much smaller one, would not seriously interrupt the flow of oil they are dreaming, and while some on the left don’t think that this should be a major concern, there is little, if any, doubt, that a major reduction in Middle East oil would cause a world wide depression at least on the scale of 1929. It might eventually force a return of US troops and be the beginning of a World War on an unimaginable scale.

Lest I be accused of playing the role of Cassandra, let me remind the reader that Cassandra’s predictions were true. But even if this is a worst-case scenario, isn’t it about time that we dealt with the worst case rather than, as this Administration has done, always expecting the best and never preparing for the worst.

If this sounds like I am advocating the Bush policy of “stay the course”, or the McCain policy “of a surge” which may soon become the Bush policy, nothing could be further from the truth. Unfortunately, the damage is done and our troops at present levels are not improving the situation. While a much larger troop deployment early on could have made a major difference, it is now too late, which appears to also be the view of Colin Powell and the Joint Chiefs of Staff.

Thus we are caught in a dilemma. To stay serves no purpose and leaving spells disaster. What are we to do? The President is the Commander in Chief. For as long as Bush holds that position he will call the shots and any attempt to lay out a policy by the opposition serves no purpose. Ultimately, it is highly likely that we will still be in Iraq in 2008 and that it will be a major issue in the Presidential and Congressional elections. At that time the Democratic Presidential candidate will have to take a position, but it will be a position on the basis of the facts, as they then exist.

I believe that our best hope will be to make the Middle Eastern nations see a Pandora’s box opening before them, and realize that only they can deal with the situation. Before 2008 or right after the election we will have to advise them that we have done all that we can and are withdrawing. We should urge one of those countries, be it Saudi Arabia, or Egypt or Jordan to convene a regional summit and try to reach agreement among them. Their future is even more at stake than ours. They must form a multinational, multi ethnic, all Muslim (drawn from both sects) military, and impose a settlement on Iraq. We can lend logistical support, but our armies will have no further role to play. Will this work? It is a long shot, but it is less of a Hail Mary pass than any of the alternatives.

How Secure is the Victory For Democrats?

In my last two postings I address first the question of bipartisanship and explained it is unlikely that there will be much bipartisanship, if any. In the following commentary I queried whether the new so-called conservative members are likely to push the Democratic Party to the Right and concluded with a resounding NO.

Now I address just how secure the victory for the Democrats is. A look at history is instructive in how much a great victory carries over to the next election.

For this purpose I go back to the historic election of 1946. The President was Harry Truman and at that time, hardly more than three weeks before the midterm elections his approval rating dropped to 32 percent. As the reader will quickly surmise, there is a parallel here to the unpopularity of President Bush prior to the just concluded midterm elections. I should add that there was another similarity to the election now. The Democrats then had a lock on the Southern vote, just as Republicans have now.

The results of the elections of 1946 were that in the House Republicans picked up 54 seats. The GOP wound up with a 59-member dominance over the Democrats. When the new Congress convened in January, Republicans occupied 75 percent of the seats outside the South. That is a far greater victory than Democrats achieved in this election

Just as in this election, it was doubtful that Democrats could win the Senate with only one third of the Senate up for election, but Republicans picked up 13 seats to take control of the chamber, 51 to 45. Compare this to the five seats that Democrats picked up in the Senate and the approximately thirty seats they picked up in the House.

In addition the unpopular Republican President Bush will not encumber the Republican ticket in the next election. Two years after that disastrous election for the Democrats, the very same Democratic incumbent President, Harry Truman, would lead the ticket.

But a lot can happen in two years. In fact a lot can happen in one campaign. . When 1948 came Truman campaigned vigorously against the "do-nothing, good-for-nothing 80th Congress," while largely ignoring the Republican nominee, Governor Dewey. In November 1948, to the astonishment of almost everyone (Who can forget the headline, “DEWEY WINS”) and to the consternation of Republicans, Truman won reelection and Democrats recaptured Congress. They picked up nine seats in the Senate and so many seats in the House that they not only recouped their 1946 losses, but also erased all gains made by the GOP in three previous elections. Of the 50 Republican newcomers in the House in 1946 who ran for reelection, 35 went down to defeat.

Can history repeat itself in reverse? I fear that it can.

Can Democrats avoid this? I believe that they can but the point is that nothing can be taken for granted. Democrats must be prudent. Whether they achieve anything or not they must not be seen as “a do nothing Congress.” Investigations will be useful, but for the most part they will only make the outgoing Administration, which is not running for reelection look even worse than they do now. But if there is one thing we can count on, Republicans will be running away from this Administration; they are already doing so. So it will be difficult to run against the record of this Administration. It will have to be based on the record of this Congress, and if they accomplish nothing, they will have to show that they did their best and that Republican obstructionism is to blame. They will have one advantage by being in the majority. They will control the agenda.

Well then what are Democrats to do? As important as the Iraq war was in this last election one other issue may very well have been more important; and that is the issue of corruption. Democrats cannot; must not shilly-shally around on this issue. The possibility that Nancy Pelosi, the new Democratic Speaker, might have picked Alcee Hastings, a man who had once been impeached and removed for taking a bribe while a federal judge would have been a disastrous beginning.

Now Pelosi faces a new dilemma. Representative William Jefferson, Dem. of New Orleans has been reelected to his seat. He was the Democrat who hid $90,000 in his freezer. He has argued that it has been about a year since the money was found and no indictment has been handed down, proving he is innocent. All it proves that the evidence to support an indictment has not been found, but that hardly puts him above suspicion, and Democrats must show that they stand for Congressman being above suspicion. This is a hard one politically. Jefferson was just reelected by his constituents-he is black and probably will have the support of much of the black caucus in Congress, but the Democrats must show that to serve in a Congress they control, one must be above suspicion. The House has the power under the Constitution to refuse to seat members who they do not consider qualified. Democrats must refuse to seat Jefferson. The fall out within the Party will be much less, than the fallout among the American people if they seat him.

The other scandal that Democrats must address is earmarks. That is not to say that all projects that are covered by earmarks are necessarily bad, but members of Congress should approve no expenditure without full committee approval, a full vetting by the Congress and a vote on the merits. Simply, revealing who inserted the earmark is not reform. Pork will always be around, but it should never be within the control of any one member, or be inserted in the dead of night, or out of the public view, and certainly not out of the view of all the members of the Congress.

That will be a good start but Democrats need to do much more.