Deficit Hawks of Both Parties Are Economic Illiterates

It’s maddening to see the deficit hawks in both parties promote the myth that our biggest challenge as a nation right now is to reduce the deficit. The bipartisan Deficit Commission led by Erskine Bowles and Alan Simpson even promoted Social Security, which has no deficit impact, as a central issue in their deficit reduction scheme.

By way of contrast, consider Francis Bator, writing in yesterday’s Financial Times (“There is no US federal debt crisis“), who committed an extreme act of economic literacy by writing this:

Fiscal prudence matters. But the helter skelter rush to cut this year’s and next year’s budget deficits is high-priced folly. For want of enough spending overall by households, businesses and government taken together, i.e., for want of enough buying, a huge amount of production capacity is standing idle, producing nothing. 13.7m unemployed workers — four for every job that is vacant — are searching for jobs instead of working and earning income. At the same time, states and local governments, forced by shrunken revenues and shrinking federal subsidies to curtail their spending, are shutting health centres, allowing roads and bridges to crumble, and laying off nurses, firemen and teachers.

With all that spare capacity, why are businesses not hiring more workers and increasing production? Because their sales people are telling them that there would be no buyers. Debt-burdened households, deficit plagued governments and businesses with a lot of their plant and machines standing idle, are simply not spending enough overall to buy all the goods and services that businesses are easily capable of producing. A trillion dollar per annum shortfall in buying is keeping production by most industries below 2007 levels and the unemployment rate near 9 per cent. And with Treasury bill rates near zero — and core wage-price inflation below target — the Federal Reserve is almost if not quite out of ammunition.

If anyone tells you that cutbacks in this year’s and next year’s federal spending will encourage enough additional private spending to make up the difference — never mind how narrow the inherited trillion dollar output and jobs gap — look him hard in the eye and ask him if he’d really bet his children’s tuition money on that proposition. It’s nonsense.

Does that notion sound familiar to you? The notion that a reduction in federal spending will automatically result in an increase in private spending?

Listen to what our local 4th Congressional District Representative, Tom McClintock, is fond of repeating:

Government cannot inject a dollar into the economy that it has not already taken out of the economy.

Wrong. Government debt-based spending is stimulative now and burdensome later, when the burden can be more easily borne. He speaks of private and government spending as if they were competing players in a zero-sum game. At a very deep level, this is an incorrect model of our economic system, in which government supports the commons, the infrastructure, the rules of the playing field on which all economic activity takes place.

Business spending is faltering not because it is competing with government spending. In fact, corporations are sitting on trillions in cash reserves. They are not spending their cash reserves because there is not enough demand out there for their products. That’s why tax cuts and other money incentives for corporations right now are crazy.

Government has the largest role in creating demand through debt-based spending.  In order to do that, it must not fall into the illiterate trap of making deficit reduction its first priority in these hard times.

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One Response to “Deficit Hawks of Both Parties Are Economic Illiterates”
  1. Anna Haynes says:

    I wonder if McClintock ever took a college economics course…
    (or biology; and clearly not climatology)

    We need to come up with a curriculum for would-be holders of public office.

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