A propaganda campaign is being waged. They're using fear. There's a debt crisis, we're told, and we're supposed to be afraid of the federal deficit. But what if the federal budget can't be balanced ? What if we're stuck with a budget deficit, for the time being, no matter what we do ?
This is the argument made by James K. Galbraith in his 2008 book The Predator State: How Conservatives Abandoned the Free Market and Why Liberals Should Too. Here's Professor Galbraith:
Deficit hawks - Democrats and Republicans alike - have never understood the effects of financial globalization on the budget. The international dimension of the budget deficit enters neither their minds nor their calculations. The Washington discussion circuit, fueled by a vocal lobby of doomsayers, continues to treat deficits as it had before, as though they were the product purely of domestic policy decisions taken in the context of balanced trade and full employment. In consequence, the public discussion of fiscal policy lost contact with reality altogether; it became instead a pantomime of vice and virtue, each achieved without any relation to actual merit of wisdom in the setting of economic policy.
The relationship between the federal budget deficit and the foreign trade deficit is know in macroeconomics as the Twin Deficits Hypothesis. At its most basic level it is little more than an exercise in elementary algebra. You can set two widely accepted definitions of GDP equal to one another, simplify and combine terms and show that a foreign trade deficit is equivalent to a federal budget deficit. (Those who wish to can see that exercise here.) This hypothesis was used by deficit hawks in the 80s, among them Paul Volcker, to argue that the federal deficit somehow caused the foreign trade deficit, as though the outsourcing of manufacturing and the dependence on foreign oil had nothing to do with it. Professor Galbraith offers a more sophisticated understanding:
There is a basic relationship in macroeconomics, as fundamental as it is poorly understood, that links the internal and the international financial position of any country. A country's internal deficit, that is, its "public" deficit and its "private" deficit - the annual borrowing by companies and households - will together equal its international deficit.
So here's the basic relationship:
Foreign Trade Deficit = Federal Budget Deficit + Private Sector Borrowing
It's an accounting issue really. More is coming in to the country than is going out, so that debt has to show up somewhere. The left-hand side of the equation isn't going anywhere. We continue to require foreign oil and it's hard to find consumer goods that weren't made elsewhere. That leaves the right-hand side. Private sector borrowing is unlikely to rise. Corporations don't need to borrow, they're sitting on tons of cash. Small firms and households are already loaded up with debt and the banks aren't lending anyway. The only place the debt can go is on the federal government's ledger. Here's Professor Galbraith again:
In sum, and to put the matter bluntly, balancing the budget is a mission impossible and a fool's errand. For practical purposes, the realized budget deficit no longer depends on federal budget policy decisions, but rather on international trade and the financial position of the private sector. So long as American foreign trade remains in a permanent state of deficit - which it has to do, so long as a growing and unstable world economy requires dollar reserves - the federal budget deficit is basically permanent.
So there it is. Until we can export more and import less, or until, God forbid, the rest of the world decides that the dollar is no longer worthy of being their reserve currency, we're stuck with a budget deficit. It's a long-term problem, for sure, but not one we can solve right away. The deficit hysteria, the phony "debt crisis", is just more shock doctrine. The financial elite want to frighten us into cutting what's left of the social safety net, education and public sector pensions. They've ordered their servants; conservative politicians and the corporate media, to scare Hell out of us so we'll accept austerity. It worked with WMD, mushroom clouds and the invasion of Iraq didn't it ?