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DEFICITS – DO THEY MATTER? AREN’T WE ARE OWN CREDITORS? (a reblog correcting textual errors)

April 17, 2013

DEFICITS – DO THEY MATTER? AREN’T WE OUR OWN CREDITORS? (a reblog correcting textual errors)

“Deficits don’t matter,” famously declared Dick Cheney, vice president to George Bush. He was repeating a statement Ronald Reagan had made earlier to the identical effect, so that establishes the Republican position on deficits for the ages, right? Wrong. Ryan, Paul, McConnell & Co. would now have you believe that our failure to deal with deficits (two four-letter words in one) portends the end of America, a fiscal fate worse than death, America is finished etc. etc. These latter day Republicans – who on the one hand lionize Reagan as their hero – totally disagree with his assessment of a balanced budget on the other, or pretend to. Their real complaint, of course, is that they are not totally in charge of the budget. History tells us how they manage such budgets when in power, and it’s not a pretty sight.

Indeed Ronald Reagan and George Bush both inherited balanced budgets (and even budget surpluses) from their Democratic predecessors when they took office, after which both proceeded to blow gaping holes in those budgets with their tax cuts for the rich and the bloating and re-bloating of defense budgets, even after the Cold War was over – which should have triggered drastic cuts in defense (via the so-called “peace dividend” we were told we would reap with the end of the Cold War and the Soviets).

It didn’t happen; our peace dividend was never paid – quite the contrary. Defense budgets went UP, thanks to neocon influences on policy and our flight from diplomacy. “Peace dividend” did not fit into the lexicon of a defense industry (and its shareholders) anxious to introduce America to more and more deadly weaponry (with their own ideas on resulting “dividends”), an America at the time with the world’s most powerful military and no visible enemies.

A perpetual state of war or fear of one suited neocons and the defense industry very well; peace is neither good for business nor “tough guy” stature in the international community. Reagan and Bush were more concerned with the defense budget item than any other, and it showed. “Deficits don’t matter,” they repeated. When ration and arithmetic failed in the budgeting process, the flag was inserted. It became unpatriotic to oppose defense budgets. Head Start and unemployment compensation were secondary to “military research.” The future of Lockheed-Martin and GE somehow morphed into the heroism of Valley Forge and Iwo Jima. Education and food were necessary evils to be endured, totally divorced from any concept of patriotism, a payoff to keep the peasants quiescent.

Reagan showed us all how much Republicans care about balanced budgets and deficits by being the first president in history to come into office when we were the world’s greatest creditor nation and leaving when we were the world’s greatest debtor nation (all in only eight years!). He (and later Bush) spent like drunken sailors, removed any opportunity to pay for such huge resulting deficits with their reckless and irresponsible tax cuts for the rich and corporate class, and when confronted with the reality of arithmetic, told us that “Deficits don’t matter.”  With such a record, one would think that present-day Republicans would hide their heads in shame, but no, they instead now insist that deficits DO matter, and matter greatly (speaking of flip-flops). They also have the unmitigated gall to call Democrats “big spenders.” Hello! It was Democrats who left budget balances and even surpluses to the tender mercies of Reagan and Bush, who promptly took us into deficit and debt stratosphere. Their propaganda to the contrary reminds me of Orwell’s “doublespeak” in 1984. It is false, but if repeated often enough. . . . . .

Obama has done a good job in reducing the deficit in any event. The budget deficit peaked out in 2009 (Obama’s first year in office) as a result of Bush’s “free wars” and tax giveaways to the tune of 1.4 trillion dollars. The Congressional Budget Office now projects the deficit for fiscal 2013 to be 845 billion dollars. Obama has brought the Bush-caused 1.4 trillion dollar deficit down by 555 billion dollars, which is quite a feat, considering that the recession Bush left us reduced our revenue collection very greatly due to massive unemployment, business failures, the corrosive effects of Bush’s housing bubble and credit card wars, bailouts etc. As the economy shows signs of life (and we get real with “defense” budgeting), there is good reason to believe Obama will reduce the budget deficit even further; and if employment and business improve even more, I think it is possible that Obama will be able to hand his successor a balanced budget (any surplus would be swallowed up in long term debt, of course, congress willing).

At present a review of the literature shows that there are those from left to right who have very different views on budgetary deficits, from those who would embrace austerity economics to force balance into the budget to those who think we should borrow more money because it is available at next to no interest. Those who would borrow more money are (in general) Keynesians, who would use such additional “time-limited, generous offers” of virtually free money to pass a tax cut for employers who hire new workers and rebuild our crumbling infrastructure at “bargain basement rates,” noting that this is the time to spend, not cut. I am a Keynesian.

Austerity economics (drastic cuts in spending) taken to its dry logical extreme would indeed bring balance to the budget, but then what? With the drastic cuts in spending necessary to achieve balance (largely to protect established wealth and international bondholders), with unemployment spiking and revenues plunging, where are we? If we follow the pattern of austerity in the eurozone now championed by Merkel-led Germany, we could be in for civil commotion (as we have seen in Spain, Greece, Portugal, and/or recession in Italy and even non-euro Britain). Third World status could be in our future if we don’t pull the right policy triggers, a possibility that should get our attention!

Deficits and debt are two different animals. Our deficits are manageable (especially with all the virtually free money floating around these days), and while our long term debt enjoys the same pinprick interest rate, it will be a Herculean task to rein it down to nothing. To do so would require an austerity regime we could not survive. It will take perhaps twenty non-austerity years to get that job done, if then.

Some commentators do not distinguish between deficit and debt. They should. There are trillions of dollars of difference. They should also recognize that the size of the debt is not a measurement of its management, but the test is rather the ratio of GDP to debt, and that as of now (with such cheap interest rates), we are doing fine. If we adopted Keynesian economics and put America back to work, thus swelling GDP, the ratio would be even better. Austerity with its guaranteed contraction of the economy, would, of course, reduce GDP and guarantee recession, since the size of the economy versus the debt would shrink (and should interest rates escalate, we would be hit with a double whammy).

Paul Krugman (New York Times) thinks that “our deficit isn’t really that big a deal.” He says unemployment is still too high and that we will not solve our deficit problem “by embracing premature austerity – a policy that has tipped Italy and the U.K. back into recession”. He’s right.  GERALD  E

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