January 3, 2013

Word: The deficit

Dean Baker,  Counterpunch - The leadership of both parties has elevated the budget deficit to be the top and virtually only issue in national economic policy. This means ignoring the downturn that continues to cause enormous amount of unnecessary suffering for tens of millions of people. But fears of big deficits are preventing us from giving the same sort of boost to the economy that got us out of the Great Depression.

The explanation is simple: Profits have returned to pre-recession levels. This means that from the standpoint of the people who own and run American businesses, everything is pretty much fine. Moreover, they see the deficits created by the downturn as providing an opportunity to go after Social Security and Medicare.

The Campaign to Fix the Debt, a nonpartisan organization involving many of the country’s richest and most powerful CEOs, sets out to do just that. It has become standard practice in Washington for Wall Street types and other wealthy interests to finance groups to push their agenda. The Campaign to Fix the Debt involves the CEOs themselves directly stepping up to the plate and pushing the case for cutting Social Security and Medicare as well as lowering the corporate income tax rate.

...There is no easy way for the private sector to replace this demand. Businesses don’t invest unless they see demand for their products, regardless of how much love we might shower on the “job creators.” In fact, if anything, investment is surprisingly strong given the large amount of excess capacity in the economy. Measured as a share of GDP, investment in equipment and software is almost back to its pre-recession level. It is hard to envision investment getting much higher, absent a major boost in demand from some other sector.

This is why it is necessary for the government to run large deficits. Ideally, the money would be spent in areas that will make us richer in the future: education, infrastructure, research and development in clean energy, etc. There is just no way around a large role for the government given the economy’s current weakness.

Robert Reich, Truth Out In fact, federal deficits are dropping as a percent of the total economy.

For the fiscal year ending in September 2009, the deficit was 10.1 percent of the gross domestic product, the value of all goods and services produced in America. In 2010, it was 9 percent. In 2011, 8.7 percent. In the 2012 fiscal year, it was down to 7 percent.

The deficit ballooned in 2009 because of the Great Recession. It knocked so many people out of work that tax revenues dropped to the lowest share of the economy in over sixty years. (The Bush tax cuts on the rich also reduced revenues.) The recession also boosted government spending on a stimulus program and on safety nets like unemployment insurance and food stamps.

But as the nation slowly emerges from recession, more people are employed — generating more tax revenues, and requiring less spending on safety nets and stimulus. That’s why the deficit is shrinking.

Yes, deficits are projected to rise again in coming years as a percent of GDP. But that’s mainly due to the rising costs of health care, along with aging baby boomers who are expected to need more medical treatment.


1 comment:

Capt. America said...

Borrowing money for infrastructure is stupid. Better to just print it. The infrastructure backs it. If you borrow, you pay twice.