In the aftermath of the Great Recession, countries have been left with unprecedented peacetime deficits and increasing anxieties about their growing national debts. In many countries, this is leading to a new round of austerity—policies that will almost surely lead to weaker national and global economies and a marked slowdown in the pace of recovery. Those hoping for large deficit reductions will be sorely disappointed, as the economic slowdown will push down tax revenues and increase demands for unemployment insurance and other social benefits.
The attempt to restrain the growth of debt does serve to concentrate the mind: It forces countries to focus on priorities and assess values. The United States is unlikely in the short term to embrace massive budget cuts, à la the United Kingdom. But the long-term prognosis—made especially dire by health care reform's inability to make much of a dent in rising medical costs—is sufficiently bleak that there is increasing bipartisan momentum to do something. President Barack Obama has appointed a bipartisan deficit-reduction commission whose chairmen recently provided a glimpse of what their report might look like.
Technically, reducing a deficit is a straightforward matter: One must either cut expenditures or raise taxes. It is already clear, however, that the deficit-reduction agenda, at least in the United States, goes further: It is an attempt to weaken social protections, reduce the progressivity of the tax system, and shrink the role and size of government— all while leaving established interests, like the military-industrial complex, as little-affected as possible.
In the United States (and some other advanced industrial countries), any deficit-reduction agenda has to be set in the context of what happened over the last decade:
- A massive increase in defense expenditures, fueled by two fruitless wars, but going well beyond that;
- Growth in inequality, with the top 1 percent garnering more than 20 percent of the country's income, accompanied by a weakening of the middle class—median U..S household income has fallen by more than 5 percent over the past decade, and was in decline even before the recession;
- Underinvestment in the public sector, including in infrastructure, evidenced so dramatically by the collapse of New Orleans' levees; and
- Growth in corporate welfare, from bank bailouts to ethanol subsidies to a continuation of agricultural subsidies, even when those subsidies have been ruled illegal by the World Trade Organization.
As a result, it is relatively easy to formulate a deficit-reduction package that boosts efficiency, bolsters growth, and reduces inequality. Five core ingredients are required.
First, spending on high-return public investments should be increased. Even if this widens the deficit in the short run, it will reduce the national debt in the long run. What business wouldn't jump at investment opportunities yielding returns in excess of 10 percent if it could borrow capital—as the U.S. government can—for less than 3 percent interest?
Second, military expenditures must be cut—not just funding for the fruitless wars, but also for the weapons that don't work against enemies that don't exist. We've continued as if the Cold War never came to an end, spending as much on defense as the rest of the world combined.
Following this is the need to eliminate corporate welfare. Even as America has stripped away its safety net for people, it has strengthened the safety net for firms, evidenced so clearly in the Great Recession with the bailouts of AIG, Goldman Sachs, and other banks. Corporate welfare accounts for nearly one-half of total income in some parts of U.S. agro-business, with billions of dollars in cotton subsidies, for example, going to a few rich farmers—while lowering prices and increasing poverty among competitors in the developing world.
An especially egregious form of corporate special treatment is that afforded to the drug companies. Even though the government is the largest buyer of their products, it is not allowed to negotiate prices, thereby fueling an estimated increase in corporate revenues—and costs to the government—approaching $1 trillion dollars over a decade.