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It’s a Matter of Priorities

The issue is NOT size of the deficit but what are the priorities or who benefits. This is a result of how our fiscal/monetary system functions. One political party understands this very well and the other who knows. 

The republicans understand that the issue is what are the priorities or who benefits. Republicans have been very consistent in this regard. They have, since Ronald Reagan, pushed for benefits that would flow to top incomes and corporations. Something that they tried to sell as ‘trickle down economics’. Just take a look at most recent version of this:

Source: Infographic: Tax Breaks vs. Budget Cuts

Keep in mind that those Bush tax cuts are still in place benefiting top incomes tremendously while on the chopping block are programs that help poor and working class families. This is class war but only one party is fighting it and the other is… well who knows. Just remember it was former Vice President Dick Cheney who said to former Treasury Secretary Paul O’Neill:

“You know, Paul, Reagan proved deficits don’t matter,”

Democrats have never recovered from the label of ‘tax and spend’. They much rather be seen as ‘fiscally conservative’ and concede helping those who need help the most while republicans continue their class war. Programs that investment in the well-being and future of American people are not wasteful but you probably won’t hear that from most democrats.

Why is it a matter of priorities or who benefits?

1) Government deficits create non-government surpluses. It’s all about sector balances. Our economy is made up of several sectors: private sector (households & businesses), government sector and the export/import sector. If we have a deficit in one sector there’s a surplus in another. This is reality. If we want a government surplus meaning tax revenue is more than spending then that means that private sector will have to run a deficit. A deficit in the private sector means more and more debt (and less and less savings) which we found from the Great Recession can cause a financial crisis. Sector balances means trade-offs. Where did you want deficits/surpluses to be?

2) Federal government has a monopoly over issuance of currency. This the nature of a fiat currency system that we have. This also means that insolvency or bankruptcy of the federal government is not an economic issue (could be political if Congress puts arbitrary restrictions on financial obligations). If you were able to pay your debtors or vendors with a currency you controlled, or be so lucky, do you think you would ever go bankrupt? Hell no - it’s simply a matter of issuing electronic transfers, since this how most financial transactions occur today, to your debtors/vendors. Electronic transfers you control and can never run out of as long as you have access to a computer. This is what is happening with the federal government. Federal government, with such control over the issuance of U.S. dollar, can always meet its financial obligations.

But this doesn’t mean that all spending or tax cuts are good. Our current deficit and economic situation with high unemployment and low economic growth proves that. Certainly there can be wasteful spending and wasteful tax cuts. This is why WHO benefits from the deficit matters. Responsible government fiscal policy (taxing and spending) should be determined and judged by how it impacts the real economy and how it produces jobs and economic growth for most Americans. Clearly our current policy is failing miserably in this regard. It’s not benefiting those who need it the most and who will transfer those benefits to the whole economy resulting in much stronger job and economic growth. No, instead we have current policies that benefit the top and that is where the benefits stay - at the top. No trickle down here.

Good luck.

Further suggested reading:

1) What is Responsible Fiscal Policy?
2) Polly wants a cracker
3) Income distribution matters for effective fiscal policy