Beyond Hysteria: Common Sense about Deficits

With the submission today of the President’s proposed budget for next year (FY 2012), Washington descends further into the furious debate about less. How much less will government do? The president pledges to freeze domestic spending for five years, reducing it to a portion of the economy not seen since Eisenhower, while investing in areas like infrastructure vital to growth.

“More big spending,” cry Republican leaders, promising to slash non-security spending by over 15% in [1] the remaining seven months of this fiscal year.

“Broken promise,” cries Michelle Bachman and the Tea Party right. Now driving the House caucus, they roll their leaders, forcing agreement on a full $100 billion cut -- more than one fifth of the total annually appropriated domestic budget in less than seven months – requiring nearly 22% cuts across the board. [2]

But since many agencies like the FBI will be protected, and personnel costs are difficult to cut quickly, the result becomes open season on programs conservatives don’t like [3] -- AmericaCorps, national service, will be zeroed out; community development block grants eviscerated; poor students will lose $800 or 15% on their Pell grants, poor women, infants and children will lose support, poor schools will lose thousands of teachers, everything from Head Start to food safety inspections will suffer.

All of this takes place in atmosphere of hype and hysteria, with politicians resorting to the age-old tactic of scaring the hell out of the American people to achieve their ends. The choices we make in budgets are moral choices. As the Bible puts it, “Where your treasure is, there your heart will be also.” But they also should involve common sense, much of which is scrapped in the current debate.

So what follows is a citizens’ guide to common sense about deficits and the debate, a handbook to help sort out who is making sense and who is not.

1. Don’t amputate on a patient still struggling to recover from a stroke

Or it’s still jobs and the economy, Sherlock. The economy is still struggling to revive from the worst downturn since the Great Depression. Nearly 25 million [4] people are still in need of full time work.

The current halting growth is not gaining much ground. As Federal Reserve Chair Ben Bernanke noted, [5]. we have gained over a million jobs since Obama and the Fed saved the economy from free fall, but that’s barely enough to cover the new entrants to the workforce. We’ve not begun to catch up on the 8 and 3/4 million jobs lost in the calamity. (That’s one reason why an alarmed Federal Reserve is engaged in qualitative easing, an extraordinary action reflecting the Board’s fear that the recovery could falter, and the economy plunge into deflation or another recession, and why Bernanke, a former Bush economic advisor, warns against [6]raising taxes or cutting spending immediately).

Cutting spending costs jobs. Teachers, police, FBI agents, social workers, food and drug inspectors, AmericaCorps kids get laid off. That costs the Federal government money. Spending on the unemployed rises -- unemployment insurance, food stamps and the like -- while tax revenues decrease.

Republicans intone the ditty that “government can’t create jobs,” although defense workers, post office employees, cops, teachers and other government employees can’t figure out what they mean. They also seem oblivious to the notion that cutting spending cuts jobs, glibly asserting that slashing spending will create jobs. The only conceivable way that would be true is if spending cuts would reduce the deficit and lower interest rates. But interest rates are already effectively below zero (that’s what the Federal Reserve’s qualitative easing means). And businesses are already sitting on trillions waiting for demand to pick up. Even if spending cuts lift the gloom in country club chatter, it is hard to imagine why that would make CEOs hire more people. In January, we lost a net of 12,000 public employee jobs [7]. That number will go up dramatically as states and localities continue to face dire budget deficits, and if Republicans in fact roll back federal spending.

Yet every budget projection – including those of Republicans – assumes that growth will continue and that unemployment will decrease slowly. If the Congress did nothing, allowing the Bush tax cuts to expire as agreed, according to the Congressional Budget Office’s baseline [8], growth alone brings the deficit down from the current alarming 9.8% of GDP to a quite manageable average 3.1% of GDP from 2014-2021. (If Republicans succeed in making the Bush tax cuts permanent, it cuts revenue by nearly two percent with a corresponding increase in annual deficits).

None of the amputations under discussion has a comparable effect on the deficit. So if you care about people, you’ll focus first on jobs and growth. If you care about the economy, you’ll focus first on jobs and growth. And if you really care about deficits, you will focus first on deficits and growth. No one in the rabid Republican caucus seems to have realized this simple reality.

2. Don't fall for the hype: The budget deficit isn’t our most debilitating deficit

The budget deficit – nearly 10%of GDP this year – is serous and unsustainable. But it is inflated by the recession which lowered tax revenues and raised spending dramatically. Continued growth will bring it down. The US isn’t, contrary to conservative rants, about to become Greece, a fact reflected in the price of our bonds which conservatives assume reflects perfect knowledge about the economy (except when they disagree with it).

The budget deficit, in fact, isn’t our most destructive deficit. The investment deficit – as President Obama has noted – saps our ability to compete globally. It also kills people and threatens lives – as those who perished when the bridge in Minnesota collapsed found out. Every year, 19 million Americans become ill from drinking contaminated water [9]; millions have been exposed to cancer producing contamination. As residents in New Orleans discovered, extreme weather will make investments in core infrastructure – from dikes, to bridges, to tunnels – even more essential.

Our trade deficit is back over $1 billion a day, with the deficit with China is setting new records. This deficit has risen when the budget was in surplus, as it was under Clinton, or in deficit under Bush. It only fell when the economy plunged into recession. A broad international consensus agrees that these extreme imbalances are destabilizing, and unsustainable. As the president has argued, redressing this deficit requires, among other things, greater investment in areas vital to our future, as well as a trade and industrial policy that makes sense.

The initial Republican leadership plan called for slashing spending on transportation and HUD by 25% for the remainder of the year. The ultras’ plan cuts even deeper. It also slashes spending on research and development, on schools, on education and training, on fast trains and new energy. As Senator Harry Reid noted, you’ll lose weight if you cut off your legs and arms, but no one rational would recommend it.

3. If you are going to cut, cut the fat first, not the muscle and bone

Thus far the entire debate about spending cuts has focused on the forlorn less than 15% [10] of the budget that is annually appropriated domestic spending. Republicans vow that increasing taxes is off the table. Defense spending continues to go up. The big stuff- - Medicare and Medicaid for example – isn’t in the discussion yet.

The result is deep cuts slashing muscle and bone and vital organs mostly from programs for the poor, rather than from poor programs. This is truly perverse. Why not focus on cutting fat?

For example, we spend about as much the rest of the world combined on our military. The Pentagon and its contracting process is a mess; its records so fouled up that not one branch of the services can be audited, much less pass one. It is the largest source of waste, fraud and abuse in the federal government, bar none.

Pentagon spending is now over 40 % higher in inflation adjusted dollars than it was under Reagan at the height of the Cold War. The US polices the world, but as former Chief of Staff Colin Powell once stated, is “running out of enemies.” We’re down to hunting a few hundred al Qaeda zealots with drones, fighting an endless war with a corrupt ally in Afghanistan, and chasing agile Somali pirates. Even China has only begun even to build a blue water navy.

The president has announced a five year freeze on domestic spending, exempting the Pentagon. Republicans want to slash the domestic spending budget starting this year, while adding $8 billion to the security budget (the military and homeland security). But any common sense budget cut would start with the Pentagon. .

4. Get the money back from where the money went

George Bush inherited a budget that was in surplus. He then squandered that surplus on tax cuts, skewed to the already rich, two wars, and a prescription drug benefit, sculpted by the drug lobby that did nothing to control prescription drug prices.

We now suffer a concentration of wealth and income not seen since the eve of the Great Depression. During the years of the Bush “recovery,” the top 1% captured fully 2/3 of the rewards of growth. They now capture nearly ¼ of the nation’s annual income. They control more wealth than 90% of Americans.

In 1980 under Reagan, the top tax rate was 60% [11]; it is now 35%. The tax rate on capital gains or income from investment was 28%; it is now 20%. Meanwhile the marginal tax rate on a medium income family of four was 20% from 1955 to 1975 and has averaged 30% since 1986.

The result, as Warren Buffett has famously noted, is that the wealthiest Americans pay a lower tax rate than their secretaries.

Any sensible program for deficit reduction must include increases taxes on the wealthy to make moral or practical sense. Instead, of course, the Republicans extracted a deal to extend the Bush tax cuts for those making over $250,000 a year for two more years, at the cost of about $40 billion a year, which will far exceed what they end up cutting from public schools, health research, food and safety, workplace safety and environmental protection this year.

5. Tax bad practrices, don't cut good programs

Excessive financial leverage and gambling of Wall Street drove the economy off the cliff. The national debt held by the public went from $6 trillion and 40% of GDP in 2009 before the collapse to $9 trillion and 62% of GDP by the end of 2010. Wall Street excess blew up the economy and ran up the debt. The big banks then got bailed out by taxpayers, and now are back paying out multi-million dollar bonuses. You’d think maybe taxing them for the pain they caused would make sense.

The gambling is back, driving by computerized trading. The average stock is held 22 seconds; [12] the average foreign currency position for 30 seconds.

This isn’t investing; it’s gambling – and we need less of it. So let’s put a small tax – less than one half of one cent – on every transaction. It would [13]over $ 100billion a year, and put a little drag on computer driven financial casino.

6. Take on the powerful, not the poor

Each year, the president has called for rolling back lavish subsides to big Oil, the drug companies, the health insurance companies and Agribusiness. Each year, he has been stymied in Congress, opposed by Republicans and conservative Democrats catering to powerful lobbies. Want to tell if Republicans are focused on cutting poor programs or cutting programs for the poor? Check to see how the subsidies for these predator interests fare in the process.

7. Focus on the disease, not the symptoms

Once the debate starts in full, you are going to hear a lot of alarm about America’s “entitlement crisis.” Forget it. We don’t have an entitlement crisis. We have a broken health care system. The blood curdling projections of long term, rising deficits and debt come entirely from rising health care costs. These are expressed in the budget largely by Medicare, Medicaid, and the Veteran’s Administration. But those are the merely the budgetary symptoms. The crippling disease in a broken health care system, dominated by powerful corporate complexes – the drug industry, the insurance companies, the hospitals – that have succeeded in having the US pay two and one half times more per capita [14]on health care than the average of other industrial countries with worse results.

Turning Medicare into a voucher or Medicaid into a limited block grant will reduce the budget symptoms, by passing more costs on the elderly, the disabled and the poor. But it won’t stop the hemorraghaing that will continue to bleed business, states and localities and families.

So here’s a common sense guide. If the debate is focused on putting a lid on Medicare and Medicaid spending, you are about to get shafted. If it is focused on empowering Medicare to negotiate bulk discounts on drugs, or a public option to compete with health insurance companies, or mandates to require insurance companies to spend more on health care and less on administration, then small sensible steps are underway.

8. If it ain’t broke, don’t fix it

Social Security is lumped in as part of the faux “entitlements crisis.” The clownish Alan Simpson, unfortunate co-chair of the President’s deficit commission, the relentless billionaire Pete Peterson, and many more in the beltway establishment keep issuing alarms about Social Security. Don’t fall for it. Social Security is not part of the deficit problem; and not be part of the solution.

Social Security is in surplus. According to the CBO [8], it will remain in surplus throughout the decade. Both parties promise that any reforms to Social Security won’t kick in until those currently aged 50 or 55 retire, so Social Security isn’t part of the deficit solution either.

Over the long term, divorced from the hysteria about deficit reduction, Social Security will need minor adjustments to insure that it continues to pay out its promised benefits in full. It also should increase, not decrease, its benefits for more vulnerable retirees, for widows, for those over 80 among others. How much will be required will depend, in part, on whether the economy grows and whether workers’ wages rise or continue to stagnate. Much of the reform can be achieved simply by lifting the cap on the payroll tax so that Paris Hilton pays the same percentage on her income as Wall Mart employees. If they are talking about cutting Social Security benefits or lifting the retirement age, you can be certain that while Wall Street got the gold, you are getting the shaft.