Dems Versus the Deficit

With the economy stumbling towards recovery -- we'll know more after this week's unemployment numbers are released -- deficit worriers and those with a political ax to grind are complaining about the budget shortfall and the accompanying national debt, and placing blame on President Barack Obama and the Democratic Congress.

Despite these mutterings, though, the American public's priority continues to be job growth; they also remain confident Democrats are better equipped to handle jobs (and deficit reduction) than the Republicans. But that won't stop the GOP or the Democratic Blue Dogs from using budget deficits as an excuse to go after progressive improvements to social insurance and infrastructure of all kinds. Progressives also need to worry that increasingly large debt interest payments, which reach hundreds of billions of dollars, could threaten their budget priorities.

Yesterday, John Podesta, the president of the Center for American Progress who headed Obama's transition team, and CAP's top economic expert, Michael Ettlinger, published an op-ed arguing in favor of a deficit-reduction target: A balanced budget in 10 years, beginning with a goal of a "primary balance" in 2014. (A primary balance is when government receipts and outlays match up, and the deficit consists entirely of interest payments on the national debt.)

Current budget forecasts suggest we'll nearly reach this goal in 2019, when the difference between all non-interest spending and revenue is projected to be .6 percent of gross domestic product, and interest payments on debt will be 3.4 percent. (This forecast is a bit optimistic, as it does not account for some traditional budget boondoggles, like the annual "fix" of the alternative minimum tax.) Podesta and Ettlinger's is an aggressive approach, and one the Obama administration is unlikely to embrace -- to reach a primary balance in 2014 would require reducing the deficit by roughly 4 percent of GDP, which is larger than all current non-defense discretionary spending.

"We take the fiscal situation seriously. As part of the 2011 budget process, we're exploring a lot of different options about how to get us on a fiscally sustainable path," Kenneth Baer, the Office of Management and Budget spokesperson, told the Prospect.

The current budget deficit is largely the result of the previous administration's fiscal profligacy (tax cuts and unpaid-for wars) and the economic crisis which was well underway by the time Obama took office. Running a relatively large deficit now is economic common sense as the public sector makes up for reduced private investment; we've seen the beneficial results in recent GDP growth and declining unemployment. The usual warning signs that come with dangerously large deficits -- rising inflation and interest rates -- have not appeared, affirming  Democrats' policy choices. Nonetheless, it's also clear that our long-term fiscal path is unsustainable thanks to rising debt.

The left has traditionally been leery of deficit-reduction initiatives because they often target progressive programs designed to increase equality. At its most cynical, deficit reduction is simply an excuse to target the poor and under-resourced. Last spring, prominent voices on the left complained about an entitlement-reform summit hosted at the White House, but little came of the event. But over the past year there has been a growing consensus among left-leaning policy experts that progressives need to be more aggressive in framing their approach to deficits and the national debt, which has resonated in liberal Washington. This was highlighted in September by a joint conference on the topic hosted by the Center for American Progress and the Center on Budget and Policy Priorities.

Though Ettlinger and Podesta affirm the broader left consensus that our current deficits are smart policy, others, including economist Paul Krugman, believe a progressive focus cutting the deficit and the debt -- even one that emphasizes tax increases and efficiency as much as spending cuts -- will play into the hands of those who see spending cuts as the only solution to deficits.

"You fall into the trap of agreeing that budget deficits are almost always a bad thing," says Josh Bivens, an economist at the Economic Policy Institute. "Budget deficits are a tool. This idea that the proper direction is smaller I think [comes at] a real cost. From a purely political point of view, we need to start with, 'This is the government spending that we have decided is appropriate and necessary, and we should fund it.'"

Bivens, and most progressive economists, support balanced budgets when the economy is strong. But current forecasts don't predict a return to full employment in the U.S. until after 2014, suggesting that the 2014 target of Podesta and Ettlinger's op-ed may be too early, particularly absent signs the deficit is causing economic problems. When I spoke with Ettlinger, he emphasized that deficit reduction should be linked to unemployment to ensure that recovery comes first, but some still worry that shifting focus could have costs in terms of lost economic growth if anti-recession policies are pulled back too early.

"You fire when you see the lights of their eyes, when you see higher interest rates from the bond markets, actual inflation rising," Bivens says about the complicated decision of when the government should switch from deficit spending to reduction. But it can be hard to know when to pull the trigger -- or where the gun is aimed.

"The concern from the progressive perspective is that if we wait until we have a gun to our head [and] interest rates spike up, at that point we're unlikely to get progressive solutions," Ettlinger says. "We're more likely to get better solutions if we're actually planning for it, and you can actually delay that moment if you show you have a path to a more balanced budget. The path in itself has a value, even before it's implemented."

For Ettlinger, the key is framing the conversation early: Deficit reduction needs to be about both increasing revenues and cutting unnecessary spending. While eschewing specifics – something common to nearly every deficit-reduction proposal -- this report he co-authored suggests mandating a gradual matching of revenue to spending over the next four years until primary balance is met in 2014. Unless preparations are made in advance, progressive priorities may be the victims of hasty attempts to cut the deficit instead of a part of a well-managed long-term approach. Jim Horney, a budget expert at CBPP, tends to agree with Ettlinger but takes a longer view: His goal is a stable debt-to-GDP ratio (approximately a 3 percent budget deficit) by 2016 or 2017. Attaining that would allow for long-term debt reduction but retain flexibility for investments now.

"There's no substantive reason to be running deficits during a period of economic growth unless there's something, some unique spending requirement, like a war or some other crisis," Ettlinger says. "If we're in a period of strong economic growth in 2014, why should we be running a deficit?"

Unfortunately for both progressives and the rest of the country, that's a pretty big "if."

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