Category Archives: Federal deficit

Federal debt not at panic level

The federal debt is a serious problem that requires attention, but perspective is in order.

America’s ratio of debt to gross domestic product is about 73 percent — uncomfortably high, but not out of line with other healthy nations. Canada and Germany, for example, have higher ratios. Greece is close to disaster with its debt-to-GDP ratio of 163 percent.

Debt always rises in times of recession. As anemic as the U.S. recovery has been, the deficit has fallen every year since 2009. Most of the reduction has been from tax revenue that comes with economic growth. In 2012, the deficit fell by $200 billion. Americans can expect it to fall more as revenues increase and unemployment falls.

Spending needs to come down, but our debt level should not inspire panic. America needs careful tax and spending reform, along with policies designed to promote revenue-generating economic growth.

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Filed under Federal deficit, stimulus

Debt-ceiling silliness

Americans might have expected House Republicans to have concluded after 2011 that using the debt ceiling as a tool for demanding fiscal cuts is an extraordinarily bad idea.
Not only did the ugly debate result in a downgrade of U.S. debt, it sunk the popularity of Congress to single digits.
As negotiations over the “fiscal cliff” continue, though, Congress is once again resurrecting the debt ceiling as a crowbar with which it hopes to leverage political power.
The recklessness of the approach is apparent to anyone who has ever used a credit card.
Keep in mind that Congress is the branch of government that authorizes expenditures. Also understand that the debt ceiling is an after-the-fact issue. Raising the debt ceiling is not about whether Congress will spend money, but whether it will make good on the expenditures it already has made.
Americans understand they should think long and hard before using their credit card to buy a big-screen television. They also understand that, once they have done so, the damage has been done. They do not have the option to revisit the decision when the credit-card bill comes in the mail.
The GOP-controlled House is painting the debt-ceiling issue as a fight between a spendthrift president and a fiscally responsible Congress. That’s a picture that may appeal to its base, but it’s a mirage. Congress, not the president, ran up the credit card. The only question is whether Congress will pay the bill.
The federal deficit is a real problem, and House Republicans are wise to worry about it. The time to fight, though, is before buying the television, not after getting the credit-card bill.

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Filed under Federal deficit

The forgotten recession

The recession happened.

It would not seem this fact escaped the notice of many Americans, but Mitt Romney’s campaign is built around the assumption that we have forgotten.

A recent manifestation of the effort to erase the recession from our collective memory was the Romney camp’s glee at a “gaffe” by Vice President Joe Biden.

Biden’s comment: “This is deadly earnest. How they can justify raising taxes on the middle class that has been buried the last four years?”

The Romney campaign was all over it.

“Vice President Biden made a stunning admission today, and we couldn’t agree more: The middle class has been ‘buried’ under the last four years of this president’s policies,” a Romney spokeswoman said. “Under President Obama, the middle class has suffered from crushing unemployment, rising prices and falling incomes.”

In a world that revolves entirely around which political party has the upper hand, the most important thing that happened about four years ago was that a Democrat was elected president. For everyone else, the most significant event was that the economy crashed.

In free fall

Four years ago, the U.S. economy was in free fall. A rapid decrease in home values did not just eliminate the limited wealth of the middle class, it devastated financial institutions. The credit market froze. Banks would not lend to each other. Businesses could not meet payrolls because banks cut off lines of credit. Lehman Brothers collapsed, and even larger financial institutions avoided collapse only with federal assistance.

Bankruptcies and bank failures skyrocketed. More Americans — 2.6 million of them — lost jobs in 2008 than in any year in the previous six decades. The stock market plummeted, taking retirement accounts with it.

A footnote in this devastating financial story is that, in January 2009, Obama took office.

Biden was right: The middle class suffered. A recession that began before Obama took office buried the middle class in unemployment, debt, vanishing savings and anxiety.

People who had a precarious hold on middle-class status lost their grip, falling by the millions into poverty.

Obama had no more to do with the disaster than Romney. Fortunately, former President George W. Bush ignored Romney’s unsolicited advice and took the first steps toward stimulus programs that helped prevent a repeat of the Great Depression.

‘Food stamp president’

In Wednesday’s debate, Romney trumpeted the fact that millions more people had to accept food stamps in the past four years, making Obama the “food stamp president.”

Is Romney so detached from the rest of America that he fails to understand this is an inevitable consequence of massive job loss? Long ago, the nation decided it would rather incur the expense of food assistance than allow people to starve. Obama cannot take credit for minimizing the hunger of the millions who found themselves destitute as a result of the recession, but he certainly deserves no blame.

Romney rallies his troops by decrying an increase in the deficit. That increase might be politically significant had there not been an intervening recession. Deficits, however, always increase in a recession. Tax revenue falls and expenses — both for welfare and stimulus — increase.

The recession that was raging when Obama took office was the worst since the Great Depression, and a contributing cause was reckless profiteering by financial institutions. Did regulations increase under the Obama administration? Of course they did. Deregulation was part of what caused financial tragedy for millions. Only a callous and irresponsible government would have failed to address the problem.

Romney does not explicitly claim that Obama caused the recession, because voters would recognize that makes no sense.

Instead, he blames Obama for each of the inevitable consequences of the recession. That makes no sense, either.

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Filed under Election 2012, Federal deficit, Recession, Romney, unemployment

Quest for a one-term president

The problem former President George W. Bush and his successor, Barack Obama, faced was major but well understood.

A massive drop in consumer demand was causing a downward economic spiral. The drop in demand caused manufacturers to reduce production. The drop in production caused layoffs, further reducing demand. Lower demand caused manufacturers to cut even more jobs.
Both presidents did the right thing, just not enough of it. Like every president confronted with a recession since the Great Depression, they implemented stimulus plans. The theory behind stimulus is to reverse the spiral. Government demand gives manufacturers a reason to increase production. As they increase production, they hire employees. Those employees have money, and they increase consumer demand. Eventually, consumer demand replaces the short-term jump in government demand.
The stimulus plans pushed through by the two presidents and approved by Congress worked. Unemployment would be higher today had the expenditures not been made. They were insufficient, however, to reverse the spiral. Both presidents underestimated the extent of the collapse in consumer demand.
If politicians were working for the people, not against them, that would not have been a major mistake. Obama tried to increase the stimulus several times, most dramatically with the American Jobs Act, which he unsuccessfully introduced in a joint session of Congress in September 2011.
Obama lost any ability to implement a stimulus plan after January 2010, when Massachusetts elected GOP Sen. Scott Brown to replace Democrat Ted Kennedy after his death. A combination of Kennedy’s illness and a delay in the swearing-in of Sen. Al Franken, D-Minn., meant that Democrats only had an effective filibuster-proof majority for about 14 weeks of Obama’s term.
Why did Republicans block efforts at a stimulus? There are two possibilities.
One was referenced by Senate Minority Leader Mitch McConnell, R-Ky., in November 2010: “The single most important thing we want to achieve is for President Obama to be a one-term president.”
Incumbents who preside over poor economies generally lose reelection. Stimulus was the best tool for improving the economy, and the GOP prevented Obama from using it.
The other reason the GOP might have blocked Obama’s efforts to expand the stimulus is the deficit.
While economist John Maynard Keynes recommended government spending — and an increase in the deficit — to escape a recession, he also recommended surpluses in times of prosperity. With good results, our government has followed his instructions on spending our way out of recessions. It has not, however, followed his advice on reducing the deficit in times of prosperity. Thus the U.S. deficit is at unprecedented levels.
This creates a dilemma. On the one hand, the most effective way to reduce the deficit is to stimulate the economy, thus increasing tax revenue and reducing welfare expenditures. On the other hand, some fear that raising the deficit any higher will cause its own problems.
The GOP has, of course, presented the deficit as its explanation for blocking Obama’s stimulus measures.
Recent evidence suggests that McConnell’s one-term explanation is the driving force.
When the federal government does not use stimulus spending to reverse a recessionary spiral, it also has the tool of quantitative easing by the Federal Reserve. It’s a less effective tool than stimulus, but it helps. Yet the GOP howled in protest last week when the Fed announced it would increase quantitative easing in an effort to reduce unemployment. If their goal was to improve the economy, but to do so without increasing the deficit, the GOP should have welcomed the Fed’s move.
The Congressional Research Service suggested another way out of the economic mess last week. What if there was a way to increase spending — thus stimulating the economy — without increasing the deficit?
For good reason, raising taxes is not viewed as a good way to finance stimulus measures. Higher taxes tend to reduce economic activity, mainly because they reduce disposable income.
What the CRS concluded, however, is that over the last 65 years, there has been no correlation between the top marginal tax rate and economic growth. This is vitally important because today’s top marginal tax rate — due to the Bush tax cuts — is 35 percent. During the years studied by the CRS, the rate had been as high as 90 percent. Nobody wants to raise rates anywhere close to 90 percent, but the study suggests a modest increase on the wealthiest Americans — to the pre-Bush 39.6 percent level — would not hurt the economy.
This should be great news for the GOP. We can stimulate the economy and reduce unemployment, and we can do so without increasing the deficit. We simply finance the stimulus with a modest increase in the top marginal tax rate. The GOP response, however, is that returning rates to pre-Bush levels would hurt “job creators.”
The indication is that McConnell’s plan is on track. The U.S. economy is hurting, and the GOP hopes Americans will blame it on Obama in November. Except for the detail of 12 million unemployed Americans, it was a brilliant strategy.

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Filed under Election 2012, Federal deficit, stimulus

Lessons from France

Not only is austerity not working in Europe, it is creating political upheaval.
The U.S. House recently passed, and a presidential candidate has endorsed, a budget that is more austere than the measures imposed in France.
The results of austerity in France were as many economists predicted. By reducing demand at a time when the economy needed an infusion of cash, a bad economy was made worse.
Economic contraction increased the deficit as tax revenue fell.
France attempted to insulate the wealthy from increased taxes as it tackled the deficit, as does the House budget. France cut social programs at a time when its people were struggling to find work, as does the House budget.
The result was not surprising. Socialist Francois Hollande beat the mastermind of the austerity budget, incumbent Nicolas Sarkozy.
There are economic and political lessons to be learned from the failed experiment in France. Congress should be taking notes.

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Filed under Federal deficit, Recession, stimulus

House shows its priorities

The U.S. House this week approved a proposed budget that gave a painfully honest view of its priorities.
The budget slashed programs that benefit seniors and the working poor. It increased financial barriers to a college education. It decreased access to health care.
Were these difficult but necessary steps in reducing the federal deficit? Hardly. The deficit increases under the plan.
Instead, the cuts in federal programs helped finance reductions in taxes for the wealthiest Americans and continued tax subsidies for America’s most profitable corporations.
The House is doing its best to increase the gap between the rich and the poor, a gap that is already at historic levels.
Most Americans are on the wrong side of that gap. They would do well to remember the House budget when voting in November.

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Filed under Election 2012, Federal deficit, Subsidies, Welfare