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Dance of the Deficit Hawks

When it comes to the deficit, Robert Kuttner, author of A Presidency in Peril: The Inside Story of Obama’s Promise, Wall Street’s Power, and the Struggle to Control our Economic Future, thinks we have two choices: he calls them “the austerity cure” and “the prosperity cure.” We could tighten our belts and slash budgets, but that, says Kuttner, would be a mistake. To get out of the Recession, we will need more stimulus, more federal spending—not less. Deficit reduction will follow.

From the Los Angeles Times:

Get ready for the dance of the deficit hawks.

The way they see it, the economy is headed for dangerous and uncharted fiscal territory because of rising deficits and debts, and therefore, we need extraordinary measures.

Tuesday is the opening meeting of President Obama’s National Commission on Fiscal Responsibility and Reform. And Wednesday, the billion-dollar Peter G. Peterson Foundation convenes its National Fiscal Summit, featuring prominent budgetary conservatives from both political parties, including key administration officials. Both groups are likely to come to the same conclusion: If Congress fails to hit a specific deficit target, then a cap on federal spending should kick in. Budget hawks tend to blame outlays such as Social Security and Medicare, and they are eager to put a lid on them.

But there’s a problem with all this fiscal alarmism. It confuses three entirely separate concerns: the current large deficits, which are caused by the deep recession; the long-term health of Social Security; and the inexorably rising costs of Medicare and of healthcare generally. If you unpack these issues, a different picture and set of choices emerges.

The current deficits — about 9% of gross domestic product — are mainly the consequence of the financial collapse and the resulting decline in tax revenues. As those deficits pile up, the national debt increases.

Debt seems frightening. But in a deep recession, we need economic stimulus far more than we need to control deficits. Because of collapsing revenues, state and local budgets are in free fall, with California leading the way. Most states have constitutional requirements to balance budgets, which means they are slashing programs and raising taxes, exactly what we don’t need during a recession. They have few options, though, without help from the federal government.

The American Recovery and Reinvestment Act of 2009 committed federal spending of $787 billion, spread over four fiscal years. But during the same four years, the state and local shortfall will be at least $600 billion. Once you factor in the state cuts, the federal stimulus starts seeming pretty paltry.

There are two basic roads to fiscal balance. We can cut spending, raise taxes, depress the rate of growth — and balance the budget at a lower level of economic output. Call it the austerity cure.

Read the whole article here.

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