If we can all agree on one thing, it's that the federal budget deficit is a big problem, right?
After all, that's the basic position of both parties, and when the chairs of President Obama's debt commission unveiled their draft proposal last week, it was the talk of Washington, with every pundit worth his salt offering praise or criticism (mostly criticism). The issue is, indeed, so pressing that the New York Times created its own interactive tool to let readers balance the budget themselves. There's even an imaginary presidential candidate, Hugh Jidette (get it?) to help draw attention to deficit crisis. Of course, the ratio of tax increases to spending cuts that you favor will likely depend on your political views. But to judge from most of the coverage, that the $1.4 trillion debt is a problem that needs to be solved sooner rather than later isn't up for debate.
Except that it is. Ever since concerns over the deficit took center-stage in Washington earlier this year, several prominent economists -- all progressives --- have been pushing back, claiming not simply that proposed spending cuts are too deep, or that the rich should be asked to sacrifice more. Rather, they've challenged the entire premise of the debate: that a budget shortfall caused by over-spending and under-taxation stands to put an undue burden on future generations, and that cuts to government programs, including Social Security, can help fix the problem. That view, they say, is based on a fundamental misunderstanding of what's driving the deficit and how government spending works. In fact, they argue, as one recently put it, that "the current deficit is a positive."
To be sure, as progressives, these thinkers--call them the deficit contrarians--already tend to take a skeptical view of efforts to cut government spending aimed at helping struggling Americans, as many deficit-cutting plans would likely do. But their credentials and prominence are such that their view deserves a much wider hearing than it's been getting -- especially given its enormous implications for the debate that's currently consuming Washington.
The starting point of the deficit contrarians' argument is that the deficit was caused not by over-spending and under-taxation, as the current debate would have it, but by the collapse in tax revenues that resulted from the 2008 financial crisis and the subsequent economic slump.
In prepared testimony before the presidential debt commission this summer, James Galbraith, a professor at the Lyndon B. Johnson School of Public Affairs at the University of Texas, argued that this means the only way to reduce the deficit is to reduce unemployment, not to cut spending or raise taxes. Galbraith (pictured above) argued that the only way to reduce unemployment without adding to the deficit through more government spending is to get banks lending again, by fixing the root problems in the financial sector that caused the financial crisis in the first place.
Galbraith -- a former director of Congress's Joint Economic Committee, and the son of the renowned liberal economist John Kenneth Galbraith -- went on to address the idea that cutting Social Security benefits can help close the deficit. That's been a mainstay of the debate, and it's a notion that the commission's co-chairs appear to subscribe to, judging from their recent proposal, which recommends significant cuts to the program. But Social Security, Galbraith noted, isn't a spending program at all. It simply transfers wealth from today's taxpayers to low-income elderly people in the future. "One can favor or oppose [cutting benefits] on its own merits as social policy," Galbraith said. "But one cannot argue that it would save real resources that are otherwise being 'consumed' by the government sector."
Next, Galbraith took on the argument that deficits will produce higher long-term interest rates, making it prohibitively expensive for the government to borrow in the future. That's not true, he countered, because the government doesn't spend in the same way that private individuals or companies do. "So long as U.S. banks are required to accept U.S. government checks - which is to say so long as the Republic exists - then the government can and does spend without borrowing, if it chooses to do so," he declared.
All in all, Galbraith said, the current mania for deficit reduction is disastrously misplaced. "The right economic objectives are to meet real problems, not those conjured from thin air by economists," he concluded. "Bringing about a rapid end to unemployment, caring properly for an aging population, cleaning up the Gulf of Mexico, coping with our energy insecurity and with climate change are all far more important objectives than reducing a projection of future budget deficits."
Galbraith's testimony may have been the most detailed and extensive presentation of the deficit contrarians' position. But its basic thrust has received support from other prominent and respected figures. Paul Krugman of the New York Times, Dean Baker, the co-director of the Center for Economic and Policy Research, a progressive economic think tank, and Robert Reich, who served as Labor Secretary in the Clinton administration, all have contended, like Galbraith, that the deficit was caused by a loss of demand triggered by the bursting of the housing bubble.
Krugman and Baker also agree that concern over creating an interest burden for future generations is misplaced. Writing recently in the Boston Review, Baker noted that the Fed can simply buy the debt and hold it indefinitely, as it's now doing. "This means that the country really has no near-term or even mid-term deficit problem," he concluded. "The current deficit is a positive. In fact, if it were larger we would have more jobs and growth."
Krugman has used very similar language. "If anything, deficits should be bigger than they are because the government should be doing more than it is to create jobs," he wrote in February.
Reich hasn't gone quite that far, but he shares the view that the focus on the deficit as opposed to the economic slump is not only misplaced, it's counter-productive. "Our biggest problem isn't the size of pending federal budget deficits or debt but an anemic recovery that may drag on for years," Reich wrote recently. "And unless we're careful, budget-deficit mania may further slow economic growth -- thereby making future debts even less manageable."
As you can see from these examples, it's not as if these prominent economists -- and others who agree with them -- have been shy about expressing their view. And yet the mainstream debate in Washington offers surprisingly little evidence that their position even exists. That means the debate is skewed from the outset.
Of course, there's at least one other high-profile figure who has downplayed the importance of a balanced budget: That would be Dick Cheney, who's famously said to have declared, while arguing for a tax cut despite a looming shortfall, that "deficits don't matter." The former veep may now be surprised to see his position endorsed by a group of economists with very different priorities.