Base on comments made here to a previous diary, I've written a new article to debate... The premise is we should be spending more and deficits don't matter....
Republicans under Bush and Democrats under Obama share a similar view. Deficits don't matter. Perhaps, they are right. If they are wrong, what are the consequences? Will spending cause a crisis or not?
Under Bush, the unfunded war and tax cuts cause a huge surge in the deficits. In his February 2005 Weekly Standard Article, Irwin Seltzer wrote:
WHEN DICK CHENEY SAID, "Deficits don't matter," economists took that as proof of the economic illiteracy of the Bush administration. But it turns out there is a case to be made that Cheney was onto something.
Base on comments made here to a previous diary, I've written a new article to debate... The premise is we should be spending more and deficits don't matter....
Republicans under Bush and Democrats under Obama share a similar view. Deficits don't matter. Perhaps, they are right. If they are wrong, what are the consequences? Will spending cause a crisis or not?
Under Bush, the unfunded war and tax cuts cause a huge surge in the deficits. In his February 2005 Weekly Standard Article, Irwin Seltzer wrote:
WHEN DICK CHENEY SAID, "Deficits don't matter," economists took that as proof of the economic illiteracy of the Bush administration. But it turns out there is a case to be made that Cheney was onto something.
On the deepest level, the vice president was echoing, in slightly exaggerated form, an idea put forward a few years ago by Irving Kristol, the Godfather of the neoconservatives who have had such a wide-ranging effect on Bush administration policy. Kristol wrote then, and still believes, that "We should figure out what we want before we calculate what we can afford, not the reverse."
Obama spent over a trillion dollars last year to jump start the economy, but failed reach their projections. Over the next several years, his administration is projected to keep the trillion dollar spending pattern with hopes of sparking economic growth.
Liberal economist Paul Krugman has been the biggest voice on the left for supporting Obama's spending plans. Although he is concerned with long term debt projections due mostly from the rising cost of healthcare, Mr. Krugman writes:
But don’t we need to worry about government debt? Yes — but slashing spending while the economy is still deeply depressed is both an extremely costly and quite ineffective way to reduce future debt. Costly, because it depresses the economy further; ineffective, because by depressing the economy, fiscal contraction now reduces tax receipts. A rough estimate right now is that cutting spending by 1 percent of GDP raises the unemployment rate by .75 percent compared with what it would otherwise be, yet reduces future debt by less than 0.5 percent of GDP.
The right thing, overwhelmingly, is to do things that will reduce spending and/or raise revenue after the economy has recovered — specifically, wait until after the economy is strong enough that monetary policy can offset the contractionary effects of fiscal austerity. But no: the deficit hawks want their cuts while unemployment rates are still at near-record highs and monetary policy is still hard up against the zero bound.
Former Labor Secretary under Bill Clinton. Robert Reich, has a similar view on deficits as to that of Dick Cheney. In his August 2009 blog he writes:
...deficits and debts mean just about nothing anyway -- at least out of context. In 1945, the federal debt was 120 percent of the entire U.S. economy. Yeegads! Yet only a few years later, the debt as a proportion of GDP had been tamed -- and not primarily because of cuts in government spending. Yes, of course, wartime spending ended. But the big change was in the denominator of the equation. Economic growth kicked in big time, and reduced the debt as a proportion of the economy to manageable levels.
The only item worth looking at is the part of the report that predicts the government will have nearly a $1.6 trillion deficit in the fiscal year that ends this Sept. 30 -- but not because that number is alarmingly large. It strikes me as alarmingly small. I'd prefer the government run a larger deficit. With unemployment and underemployment still rising, consumers still pulling away from the malls, business investment still in the basement, and exports still dead, the federal government has to spend more -- and the deficit has to be larger -- in order to get people back to work.
While both political parties agree that deficits are necessary for economic growth, their reasoning differs. Republicans are in the corner of cutting taxes to raise revenues to get out of an recession which gives people more money to spend which would result in more demand for goods and services, increased productivity, increased jobs and tax revenue. Democrats like stimulus packages that are targeted at purchasing goods and services from industries which will result in an increase in productivity, job creation and tax revenue. The debate of which idea works or is better is endless. Both ideas increase deficits.
If Government only deficit spent during recessions, there would not be a long-term debt crisis. Both parties agree the long-term problem is huge! Neither party offers solutions to fix the problem, except to contend that the long-term problem can't be addressed until the short-term needs are fixed. Really?
Unless you live under a rock, most American's know that rising healthcare costs for baby boomers is at the heart of the long-term debt disaster. Social Security, while a problem, is a fixable problem. The new Health Care bill by most estimates fails way short of doing anything to fix the problem. Neither party nor economists are offering solutions that fix our short term and long-term needs at the same time.
The current trillion dollar deficits are financed by mostly printing money. We borrow from ourselves. Borrowing the debt from foreign lenders finances a smaller percentage of deficits. In both cases, we pay an interest on the money borrowed. In ten years, the interest on the debt alone will be $1 trillion per year.
Krugman seems to be worried about the long-term debt, but why? Why can't we just print trillion of dollars each year to pay off debt? Why is this a crisis? When do we reach the crisis point? How much debt pushes us over the edge to disaster?
Certainly, we can afford the cost of printing the dollars? We have enough trees to make the paper. There's not an ink shortage. We can print as much as we need which is our current policy. What does this have to change in the future?
The value of the dollar isn't based on the gold in Ft. Knox. It is just paper with ink on it. The value comes from a perception shared by the world. The value is really psychological. Any crisis will come from a change in the perceived value of the dollar. The dollar is not worth a dollar anymore when the world opinion views the value of U.S. currency as worthless. Can that happen? How?
Is it possible for the only super power in the world to destroy the value of the currency by deficit spending? If the answer is yes, then how much deficit spending will destroy the value? As citizens of the United States, do we not have a right to know and understand the answer to this question? Does anyone have this answer?
All these smart people on the right and left profoundly defend deficit spending as a necessity. However, they don't seem to chime in on when the spending will reach a level of crisis. There must a debt level or percentage of GDP that if reached will destroy the value of the dollar. Or, perhaps they don't really believe the United States can reach that level.
If there's a number, what is it? If not, then there is no looming crisis.
Read more: http://www.deficitaid.com/...
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