All Deficits and No Jobs Make Homer Something Something
Deficits don’t matter during a recession. We should be running deficits during a recession. We should be running deficits when there is little to no inflation. We should be running deficits when unemployment is at nearly 10%. We should be running deficits when consumer demand has dropped off a cliff. We should be running deficits when structural changes to the economy are following one of the worst bubble-bursts in decades.
We should not be arguing over who has the best deficit-reduction strategy. We should not be arguing about raising taxes on the rich. We should not be considering major spending cuts in the domestic economy at the state, city or federal levels. The private economy won’t soak up the jobs that are lost.
If we’re going to talk about spending cuts, we should talk about cuts that won’t hit the domestic economy. I’m talking about defense, primarily. One troop in Afghanistan costs $1 million a year. Let’s put that into our domestic economy and create twenty jobs at $50,000 a year a piece.
But really, we should be talking about jobs and growth, not debt and deficits, period.
It’s important to remember that right now debt is cheap. Debt is cheaper than cash. And so long as we’re good on our debts, and don’t default, and don’t spook bond holders and markets, it will remain very cheap to keep borrowing. It will be much, much more expensive to not achieve normal growth. David Leonhardt made this point a while back and I want to re-emphasize it again now:
If the economy grew one half of a percentage point faster than forecast each year over the next two decades — no easy feat, to be fair — the country would have to do roughly 40 to 50 percent less deficit-cutting than it now appears, based on my reading of budget data from the economists Alan Auerbach and William Gale.
To get a concrete sense for what this would mean, you can play around with the The Times’s online deficit puzzle. It asks you to find almost $1.4 trillion in annual spending cuts and tax increases by the year 2030. If growth were a half point faster than expected, the needed savings would instead drop to less than $700 billion. That would mean many fewer painful choices, be they tax increases or Medicare cuts.
So arguably the single best way to cut the deficit is to make sure that any deficit-cutting plan does not also cut economic growth. Ideally, it will lift growth.
Nobody has convincingly explained how closing the deficit gap will result in increased rates of growth. If we were simply taxing too high, and savings in taxes went directly into consumers’ pockets, that would be different. But that also wouldn’t be a deficit issue at all. We would be talking about lowering taxes to increase growth. We are instead talking about lowering borrowing to achieve growth. I can’t follow this line of thinking at all.