Spending Not the Cause of Our Problems

"Runaway government spending" is an easy target now. It is not the cause of our problems. Government spending will not "crowd out" private investors. It is essential in stimulating the demand on which the private sector and even our ability to sustain healthy debt to gross national product ratios depend.

Further cuts in domestic job creation, sure to result from the refusal by Congress to extend unemployment benefits, will be counterproductive. It will lead to more unemployment, more benefit spending for prisons, emergency health care, domestic violence, and further declines in government revenues - a true death spiral.

That message, however, hardly ever gets a hearing. CNBC anchors regularly proclaim: "only the private sector creates wealth." I wonder what these anchors would be using for their research and communication but for massive government subsidy and research and development on computers and the Internet.

Critics also claim that the Obama stimulus did not work. Using carefully sourced data the nonpartisan Congressional Budget Office shows that the stimulus package created jobs and saved others that would have been lost.

The problem here is political.

As even some business economists pointed out at the time, the initial Obama package was far too small. Dean Baker points out the federal package amounted to less than half of the trillion-dollar hole caused by the housing bubble collapse. Government stimulus was reduced even further by cuts in state government spending.

Perhaps President Barack Obama could not have achieved more, but he should have chastised Congress and made clear the country would need more and soon. Obama's inflated claim on behalf of that modest legislation is a major reason that more federal job creation is so politically difficult.

The deficit mania has other deeper roots. A core within the business community, especially financial services, never accepted the New Deal.

Social Security always has been especially offensive. It is a universal program that worked and became very popular. It constitutes the major reason poverty rates among the elderly declined dramatically. Had George W. Bush privatized Social Security, our great recession likely would have become Great Depression II.

Unable to go after the program directly, conservatives attacked Social Security through fallacious arguments that the program, which its bipartisan trustees certify as fully funded through 2044, is a fiscal time bomb. As Baker points out, the real fiscal time bombs are exploding private sector dominated health costs, the bank bailouts and war costs of a trillion dollars and counting. Concern about deficits never has prevented the business press or our senators from supporting these corporate behemoths.

Paul Krugman also provocatively argues that more than immediate monetary interests drive this issue. Ideological and even identity issues are in play. Krugman cites John Maynard Keynes' powerful aside on classical capitalist culture: "The completeness of [the notion that government can do nothing] is something of a curiosity and a mystery. It must have been due to a complex of suitabilities in the doctrine to the environment into which it was projected. That it reached conclusions quite different from what the ordinary uninstructed person would expect, added, I suppose, to its intellectual prestige. That its teaching, translated into practice, was austere and often unpalatable, lent it virtue. That it was adapted to carry a vast and consistent logical superstructure, gave it beauty. That it could explain much social injustice and apparent cruelty as an inevitable incident in the scheme of progress, and the attempt to change such things as likely on the whole to do more harm than good, commended it to authority. That it afforded a measure of justification to the free activities of the individual capitalist, attracted to it the support of the dominant social force behind authority."

The anti-deficit mania has tangled roots both in immediate monetary interests and in the broader political culture. It has surprising support among some working-class citizens, who stand to lose from its implementation. They are led by, and in turn sustain, the so-called Blue Dog Democrats. Nonetheless, its deep and tangled roots constitute no reason to treat it as inevitable.

Why deficit mania cuts across class and how to construct a culture and economics that sustains full employment will be the subject of my next column.

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