Camilla Auger and Ken Ransford: Should deficit reduction be the top U.S. priority?
July 31, 2010
Editor’s note: Each Saturday leading up to the Aug. 10 primary elections, The Aspen Times will publish a point/counterpoint series, produced by local Democrats and Republicans. Today marks the fourth installment of the series, with each side addressing the national deficit from their respective party’s perspective.
The central political issue for the November elections currently is the supposed conflict between the need to create more jobs through additional federal stimulus spending and the need to control and reduce the federal deficit. Republican commentators appear to believe that deficit reduction should be the only priority, other than tax reduction. Election ideology and practice offer a dramatic contrast. President Reagan and both Bush presidents ran major deficits compared to past presidents. President Clinton ran a highly successful economy and also managed to turn the deficit he inherited into a major surplus without a single Republican vote for the Clinton budget.The question of deficit reduction versus economic stimulus is a false choice. President Obama has spoken repeatedly and consistently about the importance of deficit reduction and President Clinton clearly demonstrated the importance of deficit reduction to a healthy economy. The question is not whether to focus primarily on deficit reduction but WHEN. In the current challenging recovery the focus should be first on additional federal stimulus and job creation with a continuing focus on deficit reduction measures to be implemented as soon as practical when the recovery fully takes off. FDR famously saved the economy from ruin, but many historians believe that he undertook too quickly to reduce federal spending, endangering and setting back his early economic achievements.Adjusted for inflation, the federal debt increased 9% per year from 1981-1992 when Presidents Reagan and Bush held the White House, and 5% per year when Bush Junior was President. By contrast, the federal debt increased only 1.7% per year after inflation when President Clinton was in office. The numbers look worse when you don’t adjust for inflation. The federal debt quadrupled from 1981-1992, and doubled again when Bush Junior was president, for an eight-fold increase when Republicans held the White House over the past 30 years. By contrast, the federal debt grew only 28% when Clinton held office.British economist Keynes said deficit spending was the key to boosting the economy when the other three growth engines-consumption, investment, and net exports-faltered. Americans today are consuming and investing less as we pay down debt, and exports aren’t rising enough to dent the 9.5% national unemployment rate. This recovery is an extremely unnerving process, fraught with uncertainty for most Americans, due in part to the debate over immediate deficit reduction versus additional federal stimulus. Additional federal stimulus which strengthens the job market and hastens the recovery would increase consumer confidence and consumer spending, the biggest driver of our economy (70%). Cutting government spending prematurely could depress our economy just as it did in 1937.Republican Milton Friedman said monetary policy-keeping interest rates low and making it easier for banks to lend-is the best cure for a weak economy. But, we’ve tried that and the economy is still weaker than it’s been since the Depression. Interest rates are at zero, but total loans outstanding at FDIC insured banks dropped 7.4% in 2009, the steeper decline since 1942.Congress passed the $787 stimulus package in February 2009. In included $289 billion in tax cuts, $154 billion for energy and infrastructure improvements, $144 billion for state and local government relief and $193 billion in entitlement programs. The Wall Street Journal stated this week on July 27 that most mainstream economists now agree that the 2009 Stimulus bill was necessary, yet only three Republicans in the Senate and none in the House voted for it 18 months ago.Today, the federal debt is $13.2 million, an increase of 32% over the debt on September 30, 2008. Carmen Reinhart and Kenneth Rogoff say on page 231 of their acclaimed book This Time Is Different that real government debt increased on average 86% in the three years following a systemic banking crisis in 13 countries since 1977. In this crisis, which they say is the worst by far since the Depression, the 32% US federal debt increase over the past two years is a fraction of what is typically experienced by countries recovering from a banking crisis. The authors do not prescribe decreased government spending.The core of economic growth clearly lies in the private sector, but without a strong government partner the economy cannot thrive. In 1954, US defense spending alone equaled 35.8% of the GDP. In comparison, all federal spending equaled 25% of the GDP in 2009. Federal deficit spending in World War II pulled us out of the Depression. Building the interstate highway system in the 1950s helped our economy immeasurably. Additional stimulus spending to improve our aging infrastructure, update our electricity transmission grid, promote wind and solar energy industries and restore the Gulf Coast ecosystem and vital fisheries can do the same for us in the next decade.All of these initiatives should focus on immediate job creation as well as clear contributions to long term economic, environmental and alternative energy development. If our competitor and economic partner, China, is successfully making these investments in their own society, we can too. Misguided Republican policies of lax regulation, increased defense spending and decreased tax revenues caused the debt crisis, and they have failed to demonstrate that immediately cutting spending won’t make things worse.
Camilla Auger is chair of the Pitkin County Democratic Party. She received her graduate school training in socioeconomics and public policy at Columbia University. She can be reached at email@example.com.Ken Ransford is a tax attorney and CPA in Basalt. He can be reached at firstname.lastname@example.org.
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