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Monday, June 14, 2010
Deficit Dialogue Won'T Fit in A Sound Bite
By Winthrop Quigley
Of the Journal
Midterm election campaigns are in full swing. Simplistic, bombastic diatribes about government budget deficits are the order of the day.
This state and this nation could use a really good, honest, informed discussion of public finance, and a group called America Speaks hopes to have one June 26 (more on this in a bit). Meanwhile, from our political candidates we can expect pandering, fear-mongering and sound bites.
The reality of public budget deficits is that they are complicated, they are hard to repair, they are not an unmitigated evil, and if we're not careful the cure for budget deficits could be worse than the disease.
I know of no economist or financial analyst who is happy about the $1.4 trillion deficit the federal government ran up in its 2009 fiscal year, but there is more to the deficit and our country's economic prospects than that one cringe-inducing number.
• Deficits are about more than irresponsible government spending.
In his June newsletter, Wells Capital Management chief investment strategist James W. Paulsen observed that globally "a serious deterioration in government finances" is not due to "out-of-control government spending" but "primarily reflects a record-setting collapse in economic activity during the 2008 recession." Growth in United States gross domestic product is 9 percent below its long-term average.
If much of the deficit is a result of economic cycles, Paulsen said, "allowing time and economic growth to wash over the globe could prove a very effective solution."
In his recent testimony before Congress, Federal Reserve Board Chairman Ben Bernanke said that one of the "primary forces putting upward pressure on the deficit is the aging of the U.S. population" because older people demand services like Medicare but they pay fewer taxes. While there are five people between the ages of 20 and 64 for each person aged 65 and older in our country, by 2030 the ratio will be three to one.
• Taxation is the part of the solution no one wants to talk about.
The Center on Budget and Policy Priorities estimated that more than $300 billion of the 2009 deficit was due to tax cuts enacted during the Bush administration and that bailouts of Fannie Mae, Freddie Mac and funding for the Troubled Asset Relief Program in 2008 contributed another $245 billion.
Writing in the Financial Times, Columbia University economist Jeffrey Sachs said that the American economy is "trapped between a federal government that provides too few public investments and services and a public that is almost maniacal in its opposition to tax rises." Sachs said politicians have "fawned" over the "super-wealthy" who "pay their campaign bills in return for low taxation."
• We know deficits are dangerous, but we don't really know at what point they become dangerous.
Bernanke warned that history has shown over time fiscal disorder will "sap the nation's economic vitality, reduce our living standard, and greatly increase the risk of economic and financial instability."
But, asked PIMCO managing director Bill Gross, "How much debt is too much? How little growth is too little? No one knows for sure."
In his Investment Outlook newsletter, Gross wrote that common sense says the "debt super cycle trend in the U.S." has reached a point that economic growth will have to be really good to service the debt the country has accumulated.
• Fixing the deficit is dangerous, too.
Cutting government budgets "leads to lower and lower growth in the short run," Gross said. Meaningful cuts in government programs means cutting the work force. Like any unemployed worker, jobless government employees spend less, save less and file for unemployment compensation, food stamps and Medicaid.
Gross said that since lower growth makes a nation less credit-worthy, driving up its borrowing costs, "it may not be possible for a country to escape a debt crisis by reducing deficits."
• Despite deficits, the economy is doing pretty well lately.
The United States economy has grown for three straight quarters, inventory levels are increasing, corporate profits are up more than 30 percent from a year ago, sales by Standard & Poors 500 companies were up more than 12 percent in the first quarter, and consumers are sitting on $7 trillion in cash assets, according to Paulsen.
Try saying all of this in a 15-second campaign commercial.
If you'd rather have an intelligent conversation about the economy and the deficit, consider attending the America Speaks national town hall meeting at 9:30 a.m. June 26 at the Albuquerque Convention Center. There, using a system of satellite and Webcast video, you can brainstorm with fellow citizens in 20 cities nationwide to identify common ground and the decisions we'll have to make to, as America Speaks puts it, "put our fiscal house in order."
America Speaks is a project of the Peter G. Peterson Foundation, the John D. and Catherine T. MacArthur Foundation and the W.K. Kellogg Foundation. The project has recruited experts from the American Enterprise Institute, the Brookings Institution, the Center on Budget and Policy Priorities, the Heritage Foundation, the Urban Institute and Economy.com to "frame the choices that will be put before the public."
Recommendations developed at the town hall will be shared with members of Congress and with President Obama's National Commission on Fiscal Responsibility and Reform.
To register go to www.usabudgetdiscussion.org. Attending the town hall costs you nothing, and they say they're even buying lunch.
You also can send comments via our comment form
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