The wrong time to reduce the deficit

Ned Harper

There is a right time and a wrong time to reduce national deficits. Franklin Delano Roosevelt learned the hard way, as Europe and the United States are today. Many economists and corporate analysts have long understood this truth.

FDR, shackled by old-school thinking, erroneously thought national economies were like households and national deficits were always dangerous. He didn't understand that your spending is my income and my spending is your income and if we all save we hurt ourselves by reducing what people want to buy ("demand"). (Saving is way up in the United States today.)

FDR's costly New Deal program stimulated the economy until in 1937 when he cut federal spending to balance the budget. He thereby killed a sustained economic recovery and plunged the economy back into a depression. The New Deal, like Obama's stimulus, didn't spend enough. What ended the depression was a much larger federal spending program called World War II.

British economist John Maynard Keynes explained the process. The time for government to increase spending and cut taxes is during economic downturns and the time to cut deficits is when the economy has recovered. History has borne him out.

The United States and Europe fell into recession in 2008 for many of the same reasons: collapse of housing bubbles, wildly speculative private financial practices (gambling through derivatives, speculative lending without adequate reserves, financial deregulation, more) - though the level of outright criminal fraud by large financial institutions was far worse in the US and notwithstanding the global impact of the English banking LIBOR scandal.

It's important to distinguish between the causes of the collapse and the root cause of today's budget deficit and our ailing economy. The story includes decreased federal revenue caused by Bush's irresponsible tax cut for the rich while increasing spending through two unfunded wars and Obama's expanding one of Bush's wars. The economic collapse itself is a major cause because it decreased tax revenue and increased spending for unemployment insurance, increased food stamps, etc.

We are still in a "demand recession." That is, the private sector (you, me, corporations) as well as the public sector (federal, state, local governments) have cut way back on demand. Corporations are not investing their hordes of cash and are not hiring because there isn't the demand to justify such expenditures. As for the public, an obscene number are suffering because of high unemployment, foreclosures, being underwater on their homes plus decades of flat earnings for most everyone except the rich, plus increasing inequality - all of which depress public demand. Meanwhile, non-defense government spending has been slashed by more than one trillion, further decreasing demand. Today, only increased government spending can close the demand gap.

Yet we talk of following Europe's example of dropping the austerity bomb on ourselves. A return to recession is what austerity brought Europe.

Nonetheless some insist the deficit is crisis number one and we must address it by cutting government spending now. Think of the debt our children will inherit, they say. And, they add, Social Security, Medicare, and Medicaid are the major culprits. Wrong and wrong again!

Social Security can be made whole for decades with a few simple adjustments such as increasing the income level of those who pay Social Security taxes. Long term, there is a major crunch coming in health care and we must find ways to control costs, but that crisis isn't now.

Today the crisis is jobs. A just-published study by Rutgers University finds that a third of households have either lost a job or have a family member who lost a job. But now that the election is over, Republicans no longer talk about jobs and Obama did not even mention that crisis in his inauguration speech.

Those who hate government and its profit-reducing regulations want to privatize everything from building army latrines in Afghanistan to education, prisons, health care to you name it, even though government does some things better and cheaper than private enterprise. The nation is throttled by those who want to turn Social Security over to Wall Street and health care back exclusively to the insurance companies - and a president who partially buys into outdated economic ideas that history has proven false.

Ned Harper is retired from teaching at Dine' College in Tsaile and Shiprock, has lived in the Four Corners since 1978, and now lives on Summit Ridge.

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