Your Holiday Guide to Deficit Reduction

10 ways to pleasure your base while (maybe) saving some cash.

David Moberg

Union members rally to support the planned ‘Access to the Region’s Core’ tunnel between New Jersey and New York City on October 19, in North Bergen, N.J. Gov. Chris Christie (R) has refused federal funds and is killing the project.

Bud­get deficit mania grips the nation’s polit­i­cal elite.

‘There isn’t a long-term deficit problem,’ Dean Baker says. ‘There’s a healthcare problem. If healthcare gets under control, economic growth goes a long way towards solving the deficit.’

Nev­er mind that many peo­ple are more wor­ried about find­ing a job, stag­nant wages, home fore­clo­sures and the state of the Main Street economy. 

Pun­dits and politi­cians from mod­er­ate cen­trists to the Tea Par­ty right-wingers are fran­ti­cal­ly warn­ing that if noth­ing changes, fed­er­al debt in 2050 will be three times the size of annu­al eco­nom­ic out­put – sup­posed proof that the end of Amer­i­ca as we know it is at hand if we don’t make tough choices.”

In late Novem­ber, bud­get ana­lysts began rolling out tough-choice plans that pre­scribe aus­ter­i­ty for gov­ern­ment, and peo­ple in the work­ing and mid­dle class­es. Cen­ter-right pro­pos­als (with­nom­i­nal­ly bipar­ti­san mix­tures of bud­get cuts and tax increas­es) have been put for­ward, most impor­tant­ly by the the co-chairs of Obama’s Fis­cal Com­mis­sion, Demo­c­rat Ersk­ine Bowles, a mul­ti-mil­lion­aire for­mer invest­ment banker, and for­mer Repub­li­can Sen. Alan Simp­son (BS); by for­mer Clin­ton bud­get direc­tor Alice Rivlin and for­mer New Mex­i­co Rep­bli­can Sen. Pete Domeni­ci (RD); and by the Pew Trust and Peter­son Insti­tute (PP).

A rejoin­der, one that showed it is pos­si­ble to cre­ate jobs and grow a new, fair­er econ­o­my while bal­anc­ing bud­gets, was pro­vid­ed by pro­gres­sive Illi­nois Demo­c­ra­t­ic Rep. Jan Schakowsky (JS; see Chicago’s Oth­er Com­mu­ni­ty Orga­niz­er) – a one-time com­mu­ni­ty orga­niz­er who is now a mem­ber of the Fis­cal Com­mis­sion; The Cit­i­zens’ Com­mis­sion on Jobs, Deficits and America’s Eco­nom­ic Future (CC) – orga­nized by the Insti­tute for America’s Future; and Our Fis­cal Secu­ri­ty (OFS), a joint project of the Eco­nom­ic Pol­i­cy Insti­tute, Demos and The Cen­tu­ry Fund. On the right, a road map” was offered by incom­ing Bud­get Com­mit­tee Chair Rep. Paul Ryan (PR), a Wis­con­sin Tea Par­ty gold­en boy.

On Decem­ber 1, Bowles and Simp­son sub­mit­ted a final Com­mis­sion plan for a vote two days lat­er. Cut­ting the deficit pre­ma­ture­ly and endan­ger­ing job mar­ket recov­ery, it closed rough­ly two-thirds of the deficit with cuts, the rest with new rev­enue – and the cuts hit Social Secu­ri­ty, Medicare and oth­er cru­cial social pro­grams as well as defense and farm sub­si­dies. Despite some tweaks of the BS draft to empha­size growth or to soft­en some blows to the mid­dle class, the final BS plan made tough” choic­es that would bal­ance main­ly on the backs of low- and mid­dle-income Amer­i­cans – the very peo­ple who were the big losers dur­ing the Bush years and the Great Recession. 

Pre­dictably, the BS plan goes easy on the CEOs, bankers, spec­u­la­tors and rich peo­ple who caused the cri­sis – the very same high­ly paid peo­ple (invest­ment bankers like Bowles) who, through the media that they con­trol, are stok­ing the deficit mania. That promi­nent­ly includes Peter G. Peter­son, the bil­lion­aire invest­ment banker (Lehman Broth­ers), one-time Nixon advi­sor and co-founder of the noto­ri­ous Black­stone Group.

This deficit grand opera plays out as a vari­a­tion on a dis­cor­dant theme: The finan­cial melt­down – viewed two years ago as a cri­sis of cap­i­tal­ism requir­ing mas­sive state inter­ven­tion – has some­how (and so con­ve­nient­ly) mor­phed into a cri­sis of gov­ern­ment. The vil­lain in this main­stream media fan­ta­sy is the wel­fare state. It is a cri­sis that demands sac­ri­fice from aver­age cit­i­zens. Under­ly­ing this blame-the-gov­ern­ment meme is a drum­beat to unleash­ing rule of mar­kets – in health­care, edu­ca­tion, pen­sions and every­thing else. It is as if the col­lapse of 2008 taught no lessons about the lim­i­ta­tions of markets.

A review of the six deficit-reduc­tion plans yields 10 points of advice.

(1) Amer­i­ca is not Greece (and in the short term, the deficit is a help, not a hin­drance). The 2010 fis­cal year deficit of $1.3 tril­lion rep­re­sent­ed rough­ly 9 per­cent of America’s gross domes­tic prod­uct. This was the biggest deficit since the end of World War II, when deep­er deficits did not inhib­it growth and, in fact, turned out to pre­cede two decades of shared prosperity.

How­ev­er, with the 2008 col­lapse of the $8 tril­lion hous­ing bub­ble, the year’s fed­er­al deficit com­pen­sat­ed for declin­ing con­sumer demand, saved or cre­at­ed as many as 3.7 mil­lion jobs and helped stop eco­nom­ic free fall.

Nation­al gov­ern­ments do not oper­ate like fam­i­ly house­holds (which also go into debt, often wise­ly for needs like edu­ca­tion). Gov­ern­ments run sur­plus­es or deficits in part as a reflec­tion of busi­ness cycles and in part as a way to mod­er­ate busi­ness cycles. But accord­ing to Eco­nom­ic Pol­i­cy Insti­tute stud­ies, debt does not con­strain future growth.

Even if U.S. debt ris­es to 70 or 80 per­cent of GDP in 2020, as dif­fer­ent agen­cies project, it will still be mod­er­ate com­pared with many oth­er rich coun­tries (in FY 2009 it ranked behind 46 oth­er coun­tries, includ­ing Japan, which had debt equal to 160 per­cent of GDP). As the econ­o­my recov­ers, it will be eas­i­er to raise more rev­enue or make cuts that do not hurt low- and mid­dle-income Amer­i­cans and thus reduce the debt, even to the arbi­trary, low goal of 40 per­cent favored by the BS Commission. 

The real­i­ty is we should be doing some­thing to boost the econ­o­my,” says Cen­ter for Eco­nom­ic and Pol­i­cy Research co-chair Dean Bak­er. Near-term focus­ing on the deficit is next to crazy.”

(2) In the next few years, the para­mount fis­cal pol­i­cy goal should be stim­u­lat­ing growth and job cre­ation. That means, first of all, not sched­ul­ing any seri­ous deficit reduc­tion plans before rough­ly FY 2015. The coun­try needs faster job cre­ation not only to reduce unem­ploy­ment but also to push up wages. Faster job, wage and GDP growth – whether stim­u­lat­ed by a 2011 Social Secu­ri­ty tax hol­i­day or new pub­lic invest­ment – will also gen­er­ate more rev­enue to reduce gov­ern­ment deficits than an econ­o­my ham­strung by con­strict­ed pub­lic demand. 

Even if growth alone can­not solve future bud­get short­falls, gov­ern­ment spurs to long-term growth – includ­ing infra­struc­ture invest­ment, basic research, more edu­ca­tion fund­ing (espe­cial­ly ear­ly child­hood), sup­port for devel­op­ing new green” man­u­fac­tur­ing, and re-bal­anc­ing the glob­al econ­o­my to reduce trade deficits – would be good in their own right.

(3) There is no rea­son to cut Social Secu­ri­ty and many rea­sons to expand it. As the BS plan states, Social Secu­ri­ty does not – and by law can­not – con­tribute to the deficit. By cur­rent pro­jec­tions it can pay full ben­e­fits until 2037, and col­lect­ing Social Secu­ri­ty tax­es on all income – from earn­ings and cap­i­tal – would make the sys­tem sol­vent for many more decades.

Yet many deficit pro­pos­als (BS, RD) tar­get Social Secu­ri­ty, cut­ting pay­ments by chang­ing the cost of liv­ing for­mu­la and rais­ing the qual­i­fy­ing age.

But as both income inequal­i­ty and people’s risk of sud­den changes in income increase, and as reli­able defined-ben­e­fit pri­vate pen­sion plans van­ish (except for exec­u­tives like Ersk­ine Bowles), the gov­ern­ment needs to increase the pay-out to retirees, not to pri­va­tize Social Secu­ri­ty as many Repub­li­cans still want. 

(4) Beware pro­pos­als that use deficits to mask attacks on gov­ern­ment, the wel­fare state, pub­lic employ­ees or Key­ne­sian poli­cies.Pres­i­dent Franklin Roo­sevelt, expand­ing on his New Deal achieve­ments, called for a Sec­ond Bill of Rights – rights to a use­ful and remu­ner­a­tive job, ade­quate income, a decent home, med­ical care, a good edu­ca­tion, and pro­tec­tion from eco­nom­ic hard­ships of old age and sick­ness. True indi­vid­ual free­dom can­not exist with­out eco­nom­ic secu­ri­ty and inde­pen­dence,” he argued.

But Rep. Ryan, (PR) the Wis­con­sin Tea Parti­er, sees in such poli­cies a cul­ture of depen­den­cy” on a gov­ern­ment with an unsus­tain­ably rapid rate of spend­ing growth” that threat­ens to smoth­er the econ­o­my” and cor­rode our nation­al character.”

The pro­posed aus­ter­i­ty bud­gets are more Ryan (PR) than Roo­sevelt, seek­ing to cut gov­ern­ment, not secure a sec­ond bill of rights.” For exam­ple, some pro­pose shrink­ing and lim­it­ing fed­er­al spend­ing to 21 per­cent (BS) or 23 per­cent (RD) of GDP, a goal that has noth­ing to do with reduc­ing deficits and every­thing to do with arbi­trar­i­ly lim­it­ing gov­ern­ment. Cur­rent­ly, the Unit­ed States tax­es and spends less as a share of GDP than all but two oth­er devel­oped coun­tries, Turkey and Mex­i­co. Tax­es account for more than 40 per­cent of GDP in eight devel­oped coun­tries, with thriv­ing economies and high stan­dards of liv­ing, but com­bined tax­es from all lev­els of gov­ern­ment in the Unit­ed States account for only 26.2 per­cent of GDP, accord­ing to data from the Orga­ni­za­tion for Eco­nom­ic Coop­er­a­tion and Development.

(5) Focus solu­tions on the real prob­lem: health­care costs. Accord­ing to the Cen­ter on Bud­get and Pol­i­cy Pri­or­i­ties, the vast major­i­ty of the pro­ject­ed deficit through 2020 comes from, in this order, the Bush tax cuts, the eco­nom­ic down­turn, Iraq and Afghan wars, and the Oba­ma stim­u­lus pro­grams. Many of the deficit plans include some mil­i­tary cuts, but none pro­pos­es a major shift on cur­rent wars. 

Looked at from anoth­er per­spec­tive, ris­ing health­care costs – both in the gen­er­al mar­ket and in pub­lic pro­grams – dri­ve vir­tu­al­ly all the ris­ing deficits. But oth­er rich coun­tries spend less with bet­ter results and low­er pro­ject­ed increas­es. Some plans (BS, RD) shift many costs to work­ers, also increas­ing med­ical and finan­cial risk to recip­i­ents. (RD and PR favor vouch­ers for buy­ing pri­vate insur­ance to replace Medicare, an option raised by BS). But mov­ing toward a pub­lic, sin­gle-pay­er plan – or at least a pub­lic option – could bring health­care costs more in line with those in peer coun­tries, con­trol the deficit, and bet­ter pro­tect aver­age cit­i­zens’ health and finan­cial well-being. 

There isn’t a long-term deficit prob­lem,” Bak­er says. There’s a health­care prob­lem. If health­care gets under con­trol, eco­nom­ic growth goes a long way towards­solv­ing the deficit.”

(6) Focus solu­tions to solve mul­ti­ple real prob­lems. A very small finan­cial spec­u­la­tion or trans­ac­tion tax, for exam­ple, would have two ben­e­fits: dis­cour­ag­ing use­less and often dan­ger­ous spec­u­la­tion, and col­lect­ing new revenue.

Like­wise, a car­bon tax – or less straight­for­ward­ly, a cap-and-trade sys­tem, even a high­er gaso­line tax – would com­bat cli­mate change, encour­age effi­cien­cy, enhance secu­ri­ty and raise rev­enues to reduce long-term debt.

(7) Make solu­tions pro­gres­sive to reduce grow­ing inequal­i­ty. The BS plan relies on bud­get cuts more than rev­enue increas­es to reduce deficits. Uni­ver­si­ty of Cal­i­for­nia at Berke­ley econ­o­mist Brad DeLong cal­cu­lates that over­all, BS gives the top 1 per­cent of income earn­ers a $7,000 a year tax cut but an aver­age $600 a year tax increase for the work­ing and mid­dle class­es.” It uses much of the tax expen­di­ture sav­ings not to cut deficits but to reduce tax rates – far out­side the Com­mis­sion man­date. The regres­sive tax bur­den adds to the dis­pro­por­tion­ate harm peo­ple of mod­est means will suf­fer from pro­gram cuts and shift­ing costs. 

The cri­sis stemmed in part from ris­ing inequal­i­ty and the poli­cies that fos­tered it, espe­cial­ly finan­cial dereg­u­la­tion. The rich should pay the bulk of any deficit reduc­tion costs: that is pro­por­tion­al to how they ben­e­fit­ed and to their abil­i­ty to pay. And new bud­get guide­lines to reduce deficits should aim to reduce inequal­i­ty over com­ing years, as the JS, CC and OFS plans would do.

(8) Help state and local gov­ern­ments with their bud­get crises. Despite deep cuts in essen­tial pro­grams and work­forces in at least 46 states, the crises con­tin­ue, accord­ing to Cen­ter for Bud­get and Pol­i­cy Pri­or­i­ties. Most states can’t run deficits and have lim­it­ed bor­row­ing pow­er. Between con­gres­sion­al Repub­li­can insis­tence on cut­ting state aid and Repub­li­can gov­er­nors’ zeal to cut state gov­ern­ment, even to the point of reject­ing fed­er­al high-speed rail invest­ment, state and local cut­backs will inten­si­fy hard­ships for the vul­ner­a­ble, and slow recov­ery of jobs and incomes.

(9) Pub­lic opin­ion is not aligned with the deficit-obsessed polit­i­cal, media and busi­ness elite. Democ­rats lost bad­ly in the mid-terms large­ly because too many work­ing- and mid­dle-class Amer­i­cans did not see Oba­ma and con­gres­sion­al Democ­rats deliv­er­ing any tan­gi­ble help for them. Some vot­ers shift­ed to Repub­li­cans out of con­cern with deficits and big gov­ern­ment, but a Novem­ber NBC/Wall Street Jour­nal poll showed lit­tle sup­port for the BS deficit plan. In Democ­ra­cy Corps polling, vot­ers by a 67 to 28 mar­gin want­ed both growth-pro­duc­ing invest­ment and deficit cuts, and by 52 to 40 per­cent want­ed Con­gress to fight against cor­po­rate inter­ests and for the mid­dle class rather than focus on con­trol­ling spend­ing, deficits and taxes.

(10) Tough choic­es. They’re not over tar­gets for debt or spend­ing as a share of GDP, nor how deeply to cut the incomes and secu­ri­ty of the work­ing and mid­dle class­es. The tough choic­es are over val­ues, such as giv­ing real­i­ty to a sec­ond bill of rights. It’s over the ques­tion plain­tive­ly posed by song­writer Flo­rence Reece to the coal min­ers of Har­lan Coun­ty as they faced the choice of being a union man or a thug.” Which side are you on? 

David Moberg, a senior edi­tor of In These Times, has been on the staff of the mag­a­zine since it began pub­lish­ing in 1976. Before join­ing In These Times, he com­plet­ed his work for a Ph.D. in anthro­pol­o­gy at the Uni­ver­si­ty of Chica­go and worked for Newsweek. He has received fel­low­ships from the John D. and Cather­ine T. MacArthur Foun­da­tion and the Nation Insti­tute for research on the new glob­al economy.

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