“Resolve deficit” by John Edward

John Edward, a resident of Chelmsford who earned his master’s degree at UMass Lowell and who teaches economics at Bentley University and UMass Lowell, contributes the following column.


Now that we have the debt ceiling crisis resolved…

Before leaving on vacation in late July, I penned that opening to a column I was drafting. I returned from vacation to find that not only could I not use that line; I had to write a different column.

The debt ceiling resolution did not resolve anything.

The Budget Control Act of 2011 increased the debt ceiling, but deferred the tough decisions. The legislation created a Congressional Joint Select Committee to make those choices. The current fiscal-year budget deficit is over $1.6 trillion. The committee must come up with a plan to reduce cumulative deficits by $1.5 trillion over the next ten years.

Last December, President Obama’s National Commission on Fiscal Responsibility and Reform released a 65-page report. Relatively speaking the process was apolitical and they came up with substantive proposals that would have reduced the deficit by almost $4 trillion by 2020. Congress largely ignored the recommendations.

Now we have a so-called “super committee” of twelve members of Congress. Most of them have exhibited partisan passion and ideological inflexibility. The parents could not decide so they left it up to the kids who are always fighting. (If you want to decide for yourself, go here and click on “Explore the Budget.” There you can see, for example, that international development and humanitarian assistance is less than 1 percent of the budget, and interest on the debt is over 6 percent.)

The calls to balance the budget exhibited a glaring lack of balance.

In the past, Congress routinely increased the debt ceiling, and no one noticed. This time, deficit hawks used it to force a budget showdown. It could have been a positive development, if only there had been true negotiations with everything on the table.

The math is simple. If we eliminated ALL non-defense discretionary spending – no money for education or transportation, no prisons, no justice – no government, there would still be a trillion dollar deficit. Non-discretionary spending has to be on the table, but it is non-discretionary for a reason. Social security checks have to go out, health care cannot be furloughed.

Serious deficit reduction must include increases in revenue. Citizens for Tax Justice estimated that $2.5 trillion of our $14.6 trillion national debt was created by the tax cuts of President George W. Bush. If Congress extends the tax cuts through the rest of this decade, they will add another $5.4 trillion. Corporate tax loopholes unfairly cost us hundreds of billions of dollars a year with very little to show for it.

The calls for drastic cuts may be cutting our own wrists.

One of the big lies deficit hawks promote is that the government does not create jobs. Tell that to the people who teach our children, build our roads, and defend our country. Tell that to the people who have jobs because of the money public servants spend.

The impulse to cut government spending is thirty years too late. When President Reagan took office, the national debt was 32 percent of Gross Domestic Product (GDP). By the time President George H.W. Bush left office, it was 66 percent. President Clinton got it down to 56 percent, but by the time President Obama took over it was up to 84 percent of GDP.

Now is the right time to figure our what our national priorities are and therefore how we are going to gradually reduce the deficit. Now is not the right time for drastic cuts.

We have been here before. After three years of deficits, President Hoover decided to balance the budget. The deficits were caused by falling revenue due to a poor economy. Thanks in part to his “budget discipline” a poor economy turned into the Great Depression.

In 1937, voters grew impatient with an economy that was recovering too slowly. FDR tried an even newer deal and decided to bring the budget into balance. The recession of 1938 was worse than the one we just went through – we could do without another.

It is difficult to defend national defense spending.

In the last decade, defense spending has more than doubled. It was 16 percent of federal spending when President George W. Bush took office. It is now 20 percent. If you add in spending not under the Department of Defense line item, national security is almost 30 percent of the money we spend.

A Sustainable Defense Task Force commissioned by Representatives Barney Frank and Ron Paul recommended cuts that would total $960 billion over 10 years. That is almost two-thirds of what the super committee is trying to come up with.

The big problem is we are focusing on the wrong problem.

The national debt is now a little over 100 percent of GDP. That is clearly too high, and continuing to run large deficits is unsustainable. However, we have been here before. After World War II, the national debt exceeded 120 percent of GDP. It took a while, but we recovered nicely.

Inequality in the U.S. has reached extremes documented once before in our history. In the last thirty years, 80 percent of income gains went to the top 1 percent of income earners. The last time inequality was this bad was just before the Great Depression. Many economic historians cite inequality as a contributing cause of the depression.

To see the future of the United States do not look to Athens, focus on London.

The national debt of Greece is 150 percent of their GDP. Their bonds were already junk-bond status before Standard and Poor’s downgraded them two more notches in late July. That is not happening here.

England is one of the few developed countries with inequality almost as extreme as ours. The rioting in the streets of London was to a significant extent driven by lack of opportunity, with youth unemployment (ages 16-24) at 20 percent.

Teenage unemployment in the United States is over 25 percent. It was 14 percent in early 2001. A recent Cornell University study concluded that half of U.S. children will be on food stamps at some point before the age of 21. Recent examples around the world demonstrate the social unrest that poverty and inequality bring. We could be next.

What to do next?

Here are resolutions for meaningful steps to reduce the deficit while promoting equality:

1) Reduce the roughly $1 trillion per year defense spending by at least 10 percent.
2) Reduce discretionary programs where current spending cannot be justified as an investment in our future.
3) Increase the retirement age for social security (with exemptions for professions with short life expectancies) and eliminate the regressive cap on payroll taxes.
4) Reduce or eliminate entitlement programs, such as employer-sponsored health insurance, and home ownership subsidies, that favor the wealthy.
5) Declare another Tea Party to fight against corporate tax loopholes.
6) Allow the sun to set on the Bush tax cuts for households making more than $140,000 (the top 10 percent of income earners).

These recommendations have the distinct advantage that they are not likely to cause another recession, something that radical cuts are likely to do. Federal tax receipts are currently only 14 percent of GDP – well below normal, and well below almost every other developed country. Another recession will decrease revenues even further, and increase the need for non-discretionary programs.

These recommendations have one serious flaw. All of these steps may be inadequate if we do not get health-care costs under control. As recently expressed by Federal Reserve Chairman Ben Bernanke: “The two most important driving forces behind the budget deficit are the aging of the population and rapidly rising health-care costs.”

In 1970, health-care spending was 7 percent of GDP. Now it is 16 percent, and the Congressional Budget Office projects that by 2025 it will be 25 percent.

I resolve to address that problem soon. We cannot wait ten years

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