The New Red-Ink Scare

We've got a new red scare. Forget Glenn Beck; the fear isn't that America is going red, it's that it is in the red. Conservatives in both parties are raising alarms about deficits and government spending. Well, get over it. If we are going to generate growth and shared prosperity out of the mess we are in, expanded public investment must be a centerpiece of the new economy.

In today's Washington, this verges on heresy. The chattering classes are raising a clamor about Obama's deficits. The growing fixation, fanned by conservatives in both parties, may well cripple any short-term recovery. Worse, the wrong-headed debate could well undermine the reforms vital to the new economy we need to build out of the ruins of the old.

Both parties still pay tribute to false idols that should have been discarded in the recent economic collapse. Republicans rail against everything Obama, chanting, "Where are the jobs?" while calling for rolling back the stimulus, abandoning health care reform, cutting spending and, no surprise, more tax cuts. They seem to have learned nothing from the crisis. Sure, they claim that they have put aside their fiscally wastrel ways, blaming it all on Bush, and have become born-again fiscal conservatives.

But this leaves them in the bizarre posture of arguing that "deficits don't matter" when the economy is growing, but are unacceptable when the economy is sinking. Step on the gas when the economy is already racing and on the brake when it is sputtering. The perpetually tanned leader of House Republicans, John Boehner, clearly believes that Americans have neither memory nor common sense. The continued high disregard that most Americans have for Republican legislators suggests otherwise.

But conservative Democrats of various ilk—the corporate New Dems, the old-boy Blue Dogs—echo the Republican fears, using the recession-driven deficits to revive their efforts to force cuts in "entitlements" (read: Social Security and Medicare). This is both bad policy and bad politics.

In reality, the world has changed. In the old economy, Americans took on more and more personal debt, and America ran up more and more global indebtedness, as we served as the world's consumer. That era was based on growing household debt and stagnant incomes, Gilded Age inequality, and inflating asset bubbles—first the dot-coms and then housing. It's over. Sure the banks, bolstered by literally trillions in subsidies from the Federal Reserve and Treasury, are setting up the casino again. But Americans, sobered by trillions lost in the value of their homes and savings, aren't binging anymore.

In the short term, as consumers cut back, businesses are laying off workers, foreclosures are continuing, bankruptcies are up. States and localities are cutting services and workers, and face staggering deficits again next year. Fifteen million Americans are unemployed—and the number keeps rising. Only federal deficit spending and the unprecedented monetary policies of the Fed have staved off a deeper depression.

The problem with Obama's stimulus is that it is too small, not too big. We'd be wise to spend more to forestall layoffs at the state and local level, to put people directly to work in urban corps and green corps, to add to public construction projects, to extend unemployment benefits, food stamps and other income supports.

Instead the deficit mania seems likely to force a stealth stimulus at best, done piecemeal and half-assed. The Congress will hopefully extend unemployment compensation in the hardest hit states. Some spending will be boosted in annual appropriations. To quiet conservative yapping, various tax breaks are increasingly bruited about—$250 for every Social Security recipient, the unproductive tax credit for first-time home buyers, and worst of all, the goofy jobs tax credit for businesses (two-thirds of which will subsidize businesses for jobs that would have been created anyway and most of the rest will go to those who game the system).

But the most destructive effect of the red-ink scare could be on our long-term growth strategy. With consumers cutting back and businesses understandably reluctant to invest without increasing demand, expanded public investment is vital to generate demand, growth and jobs. (For a more detailed version of this argument, see economist Thomas Palley here.) [3]

We need to rebuild America. For too long, we've starved investment in the areas vital to our future -- in 21st-century infrastructure, in research and development, and in education and training. Vastly expanded investment in modernizing the electric grid, extending and accelerating broadband, building fast trains, replacing collapsing water systems, doing just the basics in education from pre-K to sophisticated worker training would generate jobs, fuel growth and produce a far more productive private economy. The American Society of Engineers tallies up over $2 trillion in investment needed just to bring our core infrastructure up to passable levels. That says nothing of building the next generation base essential to a high-wage society in a global economy.

Moreover, public investment is central to moving from a policy unleashing Wall Street speculation to one rebuilding Main Street manufacturing. Less of public investment tends to leak abroad. We can use our purchasing power to encourage companies to bring the best technology here, and help bring the supply chains with them. With the energy and environmental costs of transport rising, buying and supplying locally already has momentum. And with a concerted investment agenda in new energy, we can insure that America is a leader in the new green industrial revolution. All of this in turn can help us move to a more balanced trade policy, even as we engage China and the other mercantilist nations in multilateral efforts to re-balance the global economy.

Much of this investment sensibly should be financed, whether through public investment banks or by deficit funding. The investments will bring returns over time and the benefits will be enjoyed by rising generations, so it is sensible they share the costs. Just as there's a difference between borrowing for a good education and running up credit card debts on Caribbean vacations, there's a difference between investing in areas vital to our future and running up deficits with top end tax cuts, military adventures and obscene drug company subsidies.

Obama's record deficit this year is the product of the economic collapse. Once the economy starts growing and people go back to work, the deficit will come down. And that need not get in the way of committing to the investments we need, so long as we're willing to pay for them over the long run.

But what of the staggering long-term deficits—running publicly held debt up to nearly three times the size of our gross domestic product by 2050, as decried by the Peterson Institute and others? There is one core reality of these fantastic projections. The great bulk of the deteriorating long-term projections come from out-of-control costs of health care. Hold health care costs down to sensible levels and there is no problem. Fail to solve soaring health care costs and there is no solution. We can neither tax enough nor cut enough spending to pay for the projected costs of health care.

This isn't exactly radical stuff. This week in Washington, the Campaign for America's Future, which I co-direct, will host a conference featuring Ohio Senator Sherrod Brown and Pennsylvania Governor Ed Rendell from America's battered manufacturing heartlands, the CEO of US Steel and Rich Trumka, the new president of the AFL-CIO, leading economists and legislators to make this case, and lay out an agenda for action. (To follow the conference go to here [4].)

But Democrats are now said to be worried that the red-ink scare will take its toll in the 2010 elections. Take another look. A recent poll [5]for the Economic Policy Institute by Hart Research shows most Americans are more sensible than ideological. Over half of Americans think unemployment is the largest problem facing the country, as opposed to less than one fourth who say the federal budget deficit is. Even a majority of Republicans agrees on that. Two-thirds of the country say the recovery plan has helped, but 81 percent believe Obama needs to do more to address the jobs problem.

Over 60 percent of those polled think the focus should be on creating jobs and investing, while only 36 percent would focus on cutting federal spending. Now Americans don't like taxes, and think, sensibly enough, that government wastes their money. But they are looking for policies that will generate jobs and growth and make sense. That's why public investment in new energy consistently polls off the charts.

In 2010, candidates will be running with unemployment over 10 percent and deficits near record levels. Surely the election will turn on who is fighting the hardest to put people to work and get the economy going, not who is best at cutting the deficit.

Eventually, if we are going to have a strategy that works, we've got to make and win the case for expanded public investment over the long term, financed in part and in part paid for, once people start going back to work again, by top-end tax hikes and new priorities.

We've done the whole small government, low taxes, deregulation number. We got top-end tax cuts, declining wages, collapsing sewers and gridlock, a ruinous financial casino and global indebtedness through corporate trade policies. The result was growing inequality, a sinking middle class, over a fourth of America's children in poverty, increasingly destructive climate change, and a harsh financial collapse and recession. It is time to go another way.