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.