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Beware of the Deficit Hawks

We have a lot budget deficit hysteria going on in Washington and business media.  The Obama Administration really kicked it off with its largely symbolic “freeze” on discretionary non-security spending in its 2011 budget proposal.  Now, politicians and Wall Street talking heads are crowing like Chicken Little - OMG the sky is falling.  But watch out for the motives of these Deficit Hawks.

First, let’s look at our current economic situation:  9.3% unemployment (reported), 16.5% REAL unemployment (U6),  economy is not operating at full capacity, and interest rates are relatively low.  A pretty weak economy overall.  Basically, we have a private sector that is still not generating jobs and the demand for products/services is not high enough for private sector to create jobs.

If we want to jump start the economy so that private sector can start creating jobs what can we do?  That’s right the only other player in the economy that is in a position to do something is the Federal Government through the use of fiscal policy.  It’s not the first time that Federal Government did this.

The Federal Government is a very unique entity.  It has a fiat currency system and the ability to issue debt in its own currency.  It is NOT like a business.  The Federal Government cannot go bankrupt or be forced into insolvency.  These are legal fictions that Deficit Hawks and gold bugs like to use to scary people. 

This doesn’t mean that everything is A OK.  Yes, there still can be wasteful government spending and inefficient programs.  Yes, budget deficits can be a problem IF, and big IF, our economy is operating at full capacity and at FULL EMPLOYMENT.  This is when government spending becomes inflationary.  But, we are far far far from FULL EMPLOYMENT and we are not operating at full capacity. 

Read what Nobel Prize winning economist Prof. Paul Krugman said about this deficit hysteria:

The deficit threatens economic recovery, we’re told; it puts American economic stability at risk; it will undermine our influence in the world. These claims generally aren’t stated as opinions, as views held by some analysts but disputed by others. Instead, they’re reported as if they were facts, plain and simple.

Yet they aren’t facts. Many economists take a much calmer view of budget deficits than anything you’ll see on TV. Nor do investors seem unduly concerned: U.S. government bonds continue to find ready buyers, even at historically low interest rates. The long-run budget outlook is problematic, but short-term deficits aren’t — and even the long-term outlook is much less frightening than the public is being led to believe.

Here is the thing.  The biggest problem right now with the budget deficit is the effects from the Great Recession - primarily a huge decrease in tax revenue and of course bailout of Wall Street didn’t help.  Check this out:

The above graph is total tax receipts.  Not a good picture.  But how does this picture and the overall budget deficit situation improve - that’s right - by putting people back to work.  But that will require more government spending either in the form of tax incentives such as Full Payroll Holiday or a direct jobs program.  As Prof. Krugman says:

The point is that running big deficits in the face of the worst economic slump since the 1930s is actually the right thing to do. If anything, deficits should be bigger than they are because the government should be doing more than it is to create jobs.

Our government is in a unique situation to do this until the private sector can start generating more jobs. 

But why the hysteria?  One, politics, the Republicans will do anything to prevent the Obama Administration from succeeding even if this means hurting the rest of us.  Consider this, how many of these Republicans who are doing their impressions of Chicken Little regarding the budget deficit voted in favor of the Bush’s huge tax cuts to the wealthiest Americans that added hundreds of billions to the federal budget deficit back in early 2000s.  Even worse, who oppose strong health care reform which would help rein in medicare costs and reduce the budget deficit in the future.

Second, there are those Deficit Hawks in both political parties that are driven by the destruction and privatization of Social Security and Medicare.  The calls are already starting:

New GOP Agenda Debuts
Game On?

Believe me, there are Democrats who would like to privatize Social Security and Medicare in order to benefit Wall Street and insurance industry campaign contributors.  Just beware when these Chicken Littles start crowing about the deficit.  It usually means that they really don’t have our interests in mind.

Good luck.