Economics & Trade Policy

A Cure That’s Worse Than the Disease


In this year’s State of the Union address, President Obama declared deficit reduction to be a critical step to move the country forward. Republicans and Democrats disagree vehemently over how much to cut from the federal budget. Yet neither party seems to have considered that the right amount might be none.

It is certainly true that we are living in an era of unprecedented deficits. In each of the last three years the federal government has run a shortfall topping $1 trillion.

It is also true that there is widespread agreement across the political spectrum that the deficits must be addressed.

As President Obama stated, “Now that the worst of the recession is over, we have to confront the fact that our government spends more than it takes in. That is not sustainable.” Just a day earlier, House Republicans pushed government spending cuts to the top of their legislative agenda.

In all this talk about the deficit, one topic has taken a back seat: the economic crisis. Perhaps we’ve become used to it. Or perhaps it is the prevailing view that – calls for civility aside – this divided Congress is unlikely to reach common ground on boosting economic growth.

The fact remains that close to one out of every 10 Americans who wants to work can't find a job. Astoundingly, the figure is closer to one in six if we count workers who have given up looking or who are working part-time but seek full-time jobs.

And although economic indicators show a slowly improving outlook, high unemployment and continued foreclosures are keeping millions of our neighbors in economic distress. There is reason to be cautiously optimistic, but the state of our economy is still fragile.

In such an environment, cutting government spending is the last thing the economy needs. The Economic Policy Institute recently wrote, “Focusing on deficits now is not only a distraction, but actually undermines the goal of generating more jobs.”

For example, the EPI estimated that the House Republican proposal would amount to roughly $60 billion in cuts. The effect of this loss of spending would be magnified, decreasing the country’s Gross Domestic Product by over one-half a percent.

The result? 590,000 lost jobs.

Robert Greenstein, Executive Director of the Center on Budget and Policy Priorities, noted that fully one-third of the spending cuts would come at the expense of state and local governments. These governments, who are already “flat on their back”, would be forced to fire even more teachers, police officers, fire fighters and other government employees.

In the fall House Speaker John Boehner (R-OH) recommended $100 billion in cuts. CBPP fiscal analyst James Horney contends, “(The proposal) would remove substantial purchasing power from a weak economy, thereby costing hundreds of thousands of jobs and raising risks of a double-dip recession.”

It is surely not worth risking our short-term economic recovery in order to cut deficits that do not pose an immediate threat.

Nevertheless, so-called deficit hawks are right to be concerned about America’s long-term economic health. Fiscal conservatives of both parties often pose America’s debt dilemma in generational terms. And indeed, no one wants to see our children and grandchildren saddled with insurmountable debt because we put off making difficult decisions in the present.

There is a sad irony in the push to curb government spending, however.

Due to the size of the national debt, even spending cuts of $100 billion would have little effect on our long-term debt obligations. These will be shaped much more significantly by rising health care costs and the extension of the Bush tax cuts.

Moreover, the slowdown in economic activity brought about by the loss of government spending would actually decrease government revenue. The result? Higher deficits.

In other words, severe cutbacks today would create significant suffering for this generation while doing little to protect future Americans.

The pain felt today would certainly be real. Current deficit-cutting proposals would force immediate budget cuts of one-third or more to government support for an array of services. These include primary and secondary education, housing, health care, border security, medical research and training, food safety and the environment — the deepest single cuts in modern American history.

On Tuesday night, President Obama proclaimed, “Every day, families sacrifice to live within their means. They deserve a government that does the same.”

The logic is certainly appealing. Yet in economics, as in comedy, timing is everything. Curbing deficits is a priority, but one that should take a back seat to economic recovery.

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