There is an astounding level of confusion surrounding the current US deficit. There are three irrefutable facts about the deficits:
First, the United States has large deficits because the collapse of the housing bubble sank the economy.
Second, if we had smaller deficits the main result would slower growth and higher unemployment.
Third, large projected long-term deficits are the result of a broken health care system, not reckless government "entitlement" programs.
The first point can be easily shown by examining the Congressional Budget Office's projections from January 2008 (pdf), before it recognized the impact of the collapse of the housing bubble on the economy. The deficit in 2007 was just 1.2 percent of GDP. The deficit was projected to stay near 1.5 percent of GDP until well into the current decade, even if the Bush tax cuts did not expire.
With deficits of this magnitude, the debt-to-GDP ratio was actually shrinking. In fact, the deficit exploded.
It wasn't because of a surge in reckless spending and/or a splurge of tax cuts, it exploded because tax collections plummeted when the economy went into a downturn. In addition, we increased spending on programs like unemployment insurance. We also had temporary stimulus measures that were explicitly intended to raise the deficit in order to boost the economy.
All of these changes were temporary. If the economy returned to its pre-recession level of unemployment tomorrow, deficits would again be quite manageable, even with no further budget cuts or tax increases.
This feeds directly into the second point: deficits are supporting the economy at present. Any steps that we take to reduce the deficit, either by cutting spending or raising taxes, would pull money out of the economy. This means slower growth and higher unemployment.
There is no plausible story that private sector demand will expand to fill the gap. In more normal times, lower deficits might mean lower interest rates, which could lead to more investment and consumption. However with interest rates already at extraordinarily low levels it is not plausible that deficit reduction would have a noticeable impact.
This means that deficit reduction is throwing people out of work. This will ruin the lives of millions of workers. It can also be a disaster for their families. One of the surest ways of hurting the life prospects for today's children is to put their parents out of work.
Finally, the long-term deficit horror stories that fill Washington parlor discussions are entirely the result of a health care system that now costs more than twice as much per person as the average for other wealthy countries. The ratio is projected to rise to three and four to one in the decades ahead.
Serious people talk about fixing the health care system, a process that may have already begun with Obamacare. Health care costs have increased far less than projected for the last five years. If this slower growth path continues, we will have no long-term deficit problem.
In short, we need deficits today to fill a huge hole in demand created by the private sector. We can best see this as an opportunity to finance public investments in the future. With a negative real long-term interest rate on federal debt, this is a great time to borrow for those with any business sense. By contrast, austerity is a great recipe for pain today and even more pain tomorrow.