This passage from Politico’s write-up of the fiscal cliff deal, on the supposed inadequacy of the agreement, stuck out to me for it’s sheer wrongness: “The pact also does little to reduce trillion-dollar-plus deficits, shore up entitlement programs, overhaul the tax code or stimulate the U.S. economy — the casualty of a polarized political culture that scorns compromise.”
What’s striking is the matter-of-fact tone, as if to say that of course our chief concern should be spending cuts and lower deficits. And it’s echoed by President Obama’s belt-tightening rhetoric, which at this point is par for the course: “The deficit needs to be reduced in a way that is balanced. Everyone pays their fair share. Everyone does their part. That is how our economy works best. That is how we grow.”
Except that’s not how we grow at all. As Stephanie Kelto explains in a great and helpful column for the Los Angeles Times, the economy grows when we—governments, businesses, individuals, etc.—spend. As she puts it, “spending creates income, income creates sales and sales create jobs.” The problem right now is that there isn’t enough spending in the economy. “The unemployment rate is like a macroeconomic thermometer,” writes Kelto, “when it registers a high rate, it’s an indication that the deficit is too small.” As such, Washington’s concern with deficit reduction looks less like responsibility and more like a deliberate attempt to hinder the recovery.
Republican and Democratic rhetoric notwithstanding, the responsible course of action for right now—while unemployment hovers at 7.7 percent—is to spend more: On infrastructure, on unemployment insurance, on lower-income tax cuts, on aid to states, etc. It’s only after we jump-start the economy and significantly lower unemployment that we should be talking about deficit reduction. Our current course of austerity—even if it’s fairly moderate—will only slow growth, depress incomes, worsen unemployment, and make life more difficult for millions of Americans.
Unfortunately, the calls for more spending have been drowned out by the even louder calls for “fiscal responsibility.” Kelto does a great job of describing the extent to which sensible economic policy faces a hostile audience in the court of elite opinion:
The public has been badly misinformed. We do not have a debt crisis, and our deficit is not a national disgrace. We are not at the mercy of the Chinese, and we’re in no danger of becoming Greece. That’s because the U.S. government is not like a household, or a private business, or a municipality, or a country in the Eurozone. Those entities are all users of currency; the U.S. government is an issuer of currency. It can never run out of its own money or face the kinds of problems we face when our books don’t balance.
The sad fact is that little of this will ever penetrate the public consciousness. Deficit reduction seems intuitively right to many people, politicians included. When you combine that with a radically anti-government Republican Party, and a Democratic Party that’s still committed to “responsible” deficit reduction, what you have is something like the status quo—another year where the government does little to put us back on a path of growth.