Squawking HawksThe current deficit debate is for the birds.
Posted Thursday, Nov. 5, 2009, at 2:21 PM ETA once-endangered species is staging a robust comeback: the deficit hawk. Hunted nearly to death during the Bush years, many varieties not seen in Washington in a decade are now perching on branches and dropping their wisdom. Look, there's the puff-chested congressional peacock hawk, frequently seen strutting about Sunday-morning-TV-show sets complaining about pork while emitting loud honks on the receipt of stimulus funds. The furrowed-brow warbler hawk (natural habitat: the op-ed pages) loathes deficit spending for the purpose of eliminating social injustice but loves it when the spending is used to finance military actions abroad. The blue-bellied partisan hawk nests in think tanks; it goes mute when members of its own party run the show but squawks loudly when opponents run up debt. On Nov. 3, birders sighted the rare skinny parrot hawk, which repeats back calls about fiscal probity. Said President Barack Obama on that date: "The government is going to have to get serious about reducing our debt levels."
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StumbleUponYes, deficits are large. But a lot of this debate is for the birds. It's not uncommon for senators of both parties who oppose health care reform on the grounds that it is fiscally irresponsible to call for the elimination of taxes on the estates of the ultrawealthy. Too often, "deficit reduction is a form of defense—as a shield for policies they don't like," says Maya MacGuineas, president of the Washington, D.C.-based Committee for a Responsible Federal Budget, a bipartisan group of deficit hawks that was worried about deficits back when we ran a surplus. Of course, if hypocrisy were a disqualification from public debate, MSNBC would be running the test pattern all day. But there's a larger reason we shouldn't let the deficit hawks ruffle our feathers: As the volume of squawking has risen, the situation has actually become less dire. And even without drastic action, the situation will improve materially in the coming year.
Much of the horrific explosion in the national debt—the deficit soared from $248 billion in 2006 to $1.4 trillion in the recently concluded Fiscal Year 2009—can be pinned on cyclical factors. When the economy goes in the tank, it creates a fiscal double whammy, gutting tax receipts and boosting demand for government spending programs that are both ordinary (increasing unemployment benefits) and extraordinary (bailouts, stimulus). Spending rose 18 percent and revenues fell 16.6 percent in fiscal 2009—the worst decline seen since the 1930s, with corporate income taxes plummeting 55 percent. Had revenues been steady, the deficit would have been only (only, he said) $1 trillion.
But signs of recovery returned with the spring. As the financial system came back from the brink, banks paid back billions in TARP funds. In its mid-session review, issued in late July, the Office of Management and Budget dialed back its estimate for the fiscal 2009 deficit from $1.84 trillion in May to $1.58 trillion, due in large part to the trimming of cash piles set aside to help Wall Street. The stock market rally, recovering corporate profits, and an economy that began to expand at a 3.5 percent rate in the summer have translated into higher-than-expected tax receipts. And so, as the treasury department's Financial Management Service reported, the final numbers came out better both on spending and receipts—with a $1.42 trillion deficit, $138 billion smaller than was forecast in July.
The consensus of economists and politicians has continually underestimated the strength and timing of the recovery. So as the recovery rolls on, we'll continue to see more upside surprises. On Nov. 2, the Treasury Department announced it would need to borrow $276 billion in the fourth quarter, 42 percent less than it thought it needed in July. All those Goldman Sachs bonuses will be taxed at the highest marginal rate. Add in the prospect of more TARP repayments and job growth, and the United States is likely to experience a sharp cyclical upturn in tax receipts. The Obama administration forecasts that the economy will grow next year at a 2 percent rate and produce a $1.5 trillion deficit. But if the economy grows more rapidly, at 3 percent or 3.5 percent, it's plausible that the deficit will shrink by 10 percent to 20 percent on its own.
Of course, we'll still be left with significant fiscal challenges. "The economy recovering faster than expected is not enough to reassure me about the fiscal picture," said Maya MacGuineas of CRFB. "And while President Obama was right to focus on the economic recovery before reducing the deficit, he has yet to make any of the hard choices necessary to deal with the budget deficit." That's a fair point, made by a consistent voice.
But most of today's situational deficit hawks aren't eager to engage in a serious conversation about the costs of health care—or about the wisdom of extending the Bush tax cuts or the future of entitlements. And the occasional calls to scale back the not-yet-spent stimulus funds for the sake of fiscal probity still ring hollow. Being obsessed with deficit reduction when the economy has suffered its largest setback since the Depression is like being obsessed with water conservation when your house is on fire—an admirable impulse, poorly timed.
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I understand the historical perspective: right now our debt/GDP is about where it was in 1953, which overall wasn't a bad year for the USA. Next year, though, it will be where it was in 1943. That's terrible. We're not even in a real war right now.
Blame who you like--hell, Reagan tripled the debt (though exceeding the borrowing capacity of the enemy is a better way of winning a war than nuclear exchange; it will be difficult to do this against China if they become hostile since they are currently lending our government $800 billion).
Regardless, we're going to soon see inflation. Or we're going to see very high taxes. We're going to see our power and flexibility diminished greatly as a nation. (Paul Kennedy's The Rise and Fall of Great Powers gives a litany of examples where this has been true. Ditto Manchester's The Last Lion). Maybe some of you don't mind this, but the consequences have usually been worse than you think for those fallen empires.
Is this really the time to start enacting a series of new entitlements? It's a practical cost/benefit question more than an ideological one, I think.
-- Bentoniani
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When have we heard this baloney before? Shrieks about how the deficit would hurt the economy were also loud and demanding in the midst of the Great Depression, when far greater credence was given to the conventional economic wisdom of the day. So, in response, FDR, in 1936, slashed spending on public works and the first Social Security taxes took effect and guess what happened?
From his inauguration in the Spring of 1933 until late 1936, the US GDP soared 50% and manufacturing was back to the 1929 levels. But then, the 'cure' espoused by the 1930's deficit hawks took effect, and in 1937 the economy got slammed by a severe recession.
When FDR repented of the folly of listening to the 'deficit hawks,' including Henry Morgenthau, and resumed New Deal programs and spending, the economy swiftly rebounded. But the damage had been done. The Depression lasted two more years than it should have. Had FDR stuck his fingers in his ears instead of listening to the deficit hawks of his day, the US economy would have been booming by 1940, if not sooner.
-- revrick
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The government ramped up spending this year in response to the sharp downturn in the economy. It wasn't just a recession, but a depression - not a great depression, but a depression none the less. Not only did consumers drastically cut spending, but businesses also reduced investment, and it is investment that sustains the economy. Consumer spending may drive businesses to invest more, but it is the investment that actually drives the purchase of capital equipment, new buildings, R&D, training, new ventures, etc - things that employ people. And when investment shriveled up, the economy was seriously injured.
In the absence of some kind of stimulus to re-start the economy, it would have entered into a downward spiral. The government had to do something to reverse the direction, because the more the economy headed south, the less money businesses wanted to invest. I don't believe they made the most efficient or effective choices for the stimulus program, but that is to be expected as the result of the political process. However, now that the economy has bottomed out, the government should shift gears to a different mechanism for driving investment that will sustain the economy.
We don't want the government to decide what to invest in, we just want it to give businesses the proper incentives to invest. So let's increase the investment tax credit to something radical - say 50%. Not a deduction, but a credit to be applied to the tax bill that is equal to half of a company's investment in R&D, capital equipment, education, health care - any expenditure we want to encourage. In combination with this very generous credit, we should increase corporate taxes to at least 50%, if not 60%, so that businesses don't hoard their profits. Let them distribute their profits as dividends if they have nothing to invest in (that double taxation of dividends should be eliminated to encourage the distribution of profits to where they can be recycled into the economy), but corporations should be given three options for using their profits: 1) they can re-invest them; 2) they can distribute them to their shareholders (who should be given the same option of re-investing dividends without paying taxes); or 3) pay taxes on them.
I would bet most companies would choose option 1 or 2, which would reduce the need for the government to spend so much money on stimulus programs. The choices of how to invest those profits would be left to those with the ideas and resources. If they choose to hoard their profits and pay taxes, well, the government can use the money.
-- onthetimes
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