On the Contrary

Paul O’Neil, then Secretary of State for George Bush, has told us that when he warned the Bush administration of a looming economic crisis in 2002, Dick Cheney replied, “Ronald Reagan proved that budget deficits don’t matter.” During the Carter years, the federal deficit had averaged $54.5 billion annually.  During the Reagan era, deficits skyrocketed, averaging $210.6 billion over the course of Reagan’s two terms in office.  Overall federal spending nearly doubled, from $590.9 billion in 1980 to $1.14 trillion in 1989. In those eight years, the United States moved from being the world’s largest international creditor to the largest debtor nation.  (Washington Post)

Right now we are in a real economic crisis and we have already authorized over $1 trillion in bailouts ($700 million for the banking crisis, and over $300 million for AIG). What many of us are calling for is a massive investment in infrastructure, alternate energy, R&D, and support of state programs to kick start our economy and get us back on track.  So if we are in such massive debt where is this money going to come from?  The answer is that we are going to borrow it.  Right now, deficits don’t matter.

Now there are a couple of reasons for this.  First it is one thing to create massive deficits so that you can cut taxes while partaking in frivolous foreign adventures, i.e. the Dick Cheney approach.  It is totally another thing to create a large deficit to invest in your future.  One is a free ride that will someday have to be paid for and the other is an investment in our future that should pay the dividends to pay for this investment.  Maybe this example will help.  Some students, especially doctors take out six figure loans to get through school.  For most of them it is a good investment, because in the future their income will allow them to easily pay off that loan and it will secure their future.  As James K. Galbraith, the economist professor at the LBJ School of Public Affairs at The University of Texas, stated in his interview with Bill Moyers last week:

“One of two things can happen. The government can take action and help stabilize the economy in which case we will have more spending but also more employment.  Or the government cannot take action and let the economy collapse in which case we will have much less tax revenue. The deficit is going to be larger either way. There is no way of avoiding that. The only question is do you work to have a good economy or do you accept a terrible economy?”

The second point is that the deficit, although larger than it was in the Bush or Clinton years, is not significantly growing as a percentage of GDP (Gross Domestic Product).  That is kind of like saying when you buy a home if your monthly payment is below a certain percentage of your monthly income, the bank figures you can afford the loan (these were the rules they blew off to create the current housing crunch).  Or as Professor Galbraith pointed out:

“Well, the deficit isn’t beyond sight. The deficits in the Bush administration in relation to the size of the economy were never all that large. They were certainly larger than they were under Clinton, but that was in part necessary because of the changed economic situation, the collapse of the dot-com bubble in 2000.”

And where are going to get that money?  It turns out that the dollar is remaining the anchor currency of the world economy; right now the euro is falling rapidly as the dollar rises.  Again as Professor Galbraith points out:

“Uncle Sam’s credit is excellent. Uncle Sam can borrow short term for practically nothing these days. Everybody wants to have Treasury Bills and bonds because they’re safe. Uncle Sam can borrow for 20 years at 4.3%. That’s the same rate that the United States could borrow at for 20 years in the last month of the Eisenhower administration. So from our point of view, we’re actually well placed, I mean, as the government of the United States is well placed to take the lead in pulling the country and the world out of this crisis.”

The biggest problem is going to have the political courage to stand up and convince America that the way out of our crisis is in the short term to increase the deficit.  Note that in all the debates the moderators all tried to push the question, what are you going to cut so you can afford your spending program.  The right answer is only those programs that do not work or are wasteful but we are not going to worry about the deficit right now.  If either candidate had said that, although exactly what we need to do, there would have been a media circus and attacks from the other side.  I am not the only one who thinks this way. Martin Wolf, the widely read columnist for the “Financial Times,” and the author of a new book, “Fixing Global Finance,” said (Fareed Zakaria GPS):

“ I do actually think that, though governments are heavily indebted, we are going to spend ourselves out of the recession. We’re going to have fiscal deficits in the Western world as a whole, which are going to be, as it were, unimaginable for some years. And the markets will swallow it, because they’ve got no other assets to buy now which they trust.”

It is going to be an uphill battle convincing our citizens and getting Republicans who have been nothing but obstructionist for the last 2 years, to understand this new dynamic and go along with it.  Hopefully Barack understands this and the voters will neuter the Republicans.