I think that the frame we’re using for our budget discussions is all wrong. We’re looking at 2009 through 2011, when the economy is in severe stress. We should be looking at ordinary times and how to get back to them.
The GOP is pursuing policies which will increase the deficit by cutting spending, lowering demand, slowing the recovery, and extending the recession
There are many reasons for the current annual deficit of $1.7 trillion. Revenues are down over $700 billion from 2007, while unemployment and related services are up about $350 billion. We’re spending $175 billion in stimulus money this year. The Great Recession is responsible for $1.225 trillion of the $1.7 trillion total.
We’re spending somewhere over $125 billion in the wars. There is no way we can win in Afghanistan – the enemy is providing security for our supply convoys.
Removing these expenses leaves a deficit of $350 billion – less than the cost of the Bush Tax Cuts.
To return to a balanced budget, we need to get unemployment below 6%, finish the wars, and find $350 billion.
One way is to repeal the Bush Tax Cuts. Revenues are at a rate of 14.9% of GDP, which is the lowest since 1980. Taxes are at historically low levels.
Another is to repeal the tax cuts for those making over $250k, adding $70 billion in revenue. Add a Financial Transaction Tax for another $100 billion. Cut military spending $150 billion. Done.
Another approach is to cut entitlements – move the burden from the government to the individual. Social Security and Medicare are programs that are a contract with the citizens. Taxpayers are paying for these programs. Social Security has produced more revenues than expenses until the Great Recession and has not added a penny to the deficit.
Social Security can be funded simply by eliminating a tax cut for the rich – removing the cap on income subject to the tax.
Medicare and Medicaid are the long term problem. Medicare pays out about $200 billion ($2.7 trillion costs vs. $2.5 trillion revenues in 2007) more a year than is taken in. Raising Medicare taxes by 8% would eliminate this shortfall in the short term. In the long term, we must transform our health care program. No other industrialized nation pays half of what we do for medical care, and none lack universal care.
The GOP wants to cut expenses NOW. This will have the effect of raising unemployment by somewhere around 700,000 jobs. This will reduce revenue and increase expenses. IF this policy is followed, the cuts will increase the deficit without increasing employment. How will this lead to recovery when it also decreases demand? $1 trillion a year of our current problem – lower revenues and higher expenses – remain, so the deficit will go on for years, adding over a trillion a year to the deficit until the economy recovers.
Assume that the GOP’s plans are put into place. The GOP plan will immediately result in the loss of several hundred thousand jobs and remove safety nets, resulting in the lowering of demand. With lower demand, there is little reason to assume that the economy will not still have 9% unemployment for five more years. If the unemployment rate stays at 9% and does not go higher, there will still be a $1 trillion shortfall each year resulting from the bad economy.
In five years, what do you have? $20 trillion in national debt and a country still on the edge of a recession - or depression - and still adding $1 trillion a year to the debt.
IF we add $2 trillion in additional stimulus into the economy over the next three years, we should create or save 7.5 million jobs (based on the CBO evaluation of the original stimulus program). This would lower the number of unemployed from 13.9 million to 6.4 million and the unemployment rate from 8.9% to 4.1%. Demand is increased, revenues are increased, expenses are reduced.
In five years, what do you have? $20 trillion in national debt and an economy that is healthy enough to be paying down the debt. In the most extreme case, the economy may get overheated from the rapid expansion, and it could be argued that tax increases would necessary to cool off the economy.
The best way to reduce the deficit is to make the economy healthy by increasing demand. Cutting spending is the worst thing you can do in a recession. We can invest our way to a healthy economy, or we can stay with the policies that got us in this mess.