Drinking the Deficit-Reduction Kool-Aid

It was the centerpiece of the president’s re-election campaign. Every time Republicans complained about trillion-dollar deficits, he and other Democrats would talk jobs.

That’s what Americans care about—jobs with good wages.

And that’s part of why Obama and the Democrats were victorious on Election Day.

It seems forever ago, but it’s worth recalling that President Obama won re-election by more than 4 million votes, a million more than George W. Bush when he was re-elected—and an Electoral College majority of 332 to Romney’s 206, again larger than Bush’s electoral majority over Kerry in 2004 (286 to 251). The Democratic caucus in the Senate now has 55 members (up from 53), and Republicans have eight fewer seats in the House than before.

So why, exactly, is Washington back to obsessing about budget deficits? Why is almost all the news coming out of our nation’s capital about whether the Democrats or Republicans have the best plan to reduce the budget deficit? Why are we back to showdowns over the deficit?

It makes no sense economically. Cutting the budget deficit—either by reducing public spending or raising taxes on the middle class, or both—will slow the economy and increase unemployment. That’s why the so-called “fiscal cliff” is so dangerous.

In the foreseeable future, our government has to spend more rather than less. Businesses won’t hire because they still don’t have enough consumers to justify additional hires. So to get jobs back at the rate and scale needed, government has to be the spender of last resort.

The job situation is still horrendous. Twenty-three million Americans can’t find full-time work. Less than 59 percent of the working-age population of the nation is employed, almost the lowest percent in three decades. tNearly 5 million Americans have been out of work for more than six months. The 40-week average spell of joblessness is almost three times the post-1948 average.

And even those who have jobs are finding it harder to make ends meet. Jobs created since the trough of the recession pay less than jobs that were lost. The median wage is 8 percent below what it was in 2000, adjusted for inflation. And wages are still heading downward: Average hourly earnings in October were 3.1 percent below what they were in October, 2010.

This isn’t just an ongoing tragedy for 23 million Americans and their families. It also robs all of us of what these people would produce if they were fully employed—roughly $2 trillion worth of goods and services that won’t be created this year.

These folks would also be paying taxes—and they’d require less unemployment insurance, fewer food stamps, and less public assistance than they do now. According to estimates by Bloomberg News, the total cost of those lost tax revenues and the extra social spending is more than twice what taxpayers will shell out this year to pay interest on the federal debt.

In other words, unemployment is hugely expensive. Debt, by contrast, is relatively cheap. The yield on the 10-year Treasury is only about 1.7 percent. Creditors worldwide are willing to lend America money that won’t be repaid for a decade at the lowest rate in living memory.

So why are we debating how to cut the deficit when we should be debating how best to use the cheap money we can borrow from the rest of the world to put more Americans to work?

Because too many Democrats inside and outside the Beltway have ingested the deficit Kool-Aid that the “serious people” on Wall Street have been serving for two decades.

And the president has been all too willing to legitimize their deficit obsession by freezing federal salaries, appointing a deficit commission, and now that the election is over, going back to deficit-speak.

A month after the election Obama was on Bloomberg Television saying business leaders need “a deal on long-term deficit reduction” before they’ll increase hiring.

That’s just not true. Before they’ll increase hiring they need customers.



We've already had a massive increase in federal spending and it hasn't helped. The reason businesses aren't hiring is that government has become too much of a burden. Obama has signaled that the productive are seen as enemies by this adminsitration.


The first sentence of this article is a joke. Obama wasn't elected on a platform of jobs. Obama was elected by repeating over and over that the "rich" must "pay their fair share." That's it. Oh, and making Mitt Romney out to be a monster.

Spending is the problem. Not revenue.

Anyone with two eyes and the will to see things as they are can see this.

Re "Spending is the problem. Not revenue."

In FY 1983 during the Reagan recovery, spending was 23.5% of GDP, taxes were 17.5% of GDP and the deficit was 6% of GDP. In FY 2012, spending was 22.7% of GDP, taxes were 15.7% of GDP and the deficit was 7% of GDP.

In other words, despite LOWER spending last year than under President Reagan, the deficit was higher because tax receipts were too low.

Reagan was president from 1981 - 1989. Why would you pick 1983 as your example year? Oh yeah, I see...because that was his worst year.

Reagan inherited a recession nearly as bad as Obama did. Unemployment rates actually peaked higher for example. But under Reagan we had a major recovery take place. Under Obama we mainly got people giving up looking for work. Reagan's massive spending also ended the Soviet Union which allowed Clinton to benefit from the end of the cold war. I'm still looking for something we got under Obama's spending...

On to Obama...2 years into Obama's Presidency his spending was 25% of GDP. And from the charts I'm looking at today it's 24%. So Reagan beats every year of Obama. I don't know where you got your number but a simple google is showing me multiple charts based on CBO figures showing numbers higher then yours.

I have no problems indexing taxes with percentage of GDP. I agree they should be higher which means they need to raise everyone's tax rates. Sorry but taxing 1% of americans isn't even going to scratch the surface...there just isn't enough of them left after the Obama recovery (most "rich" people nowadays are being created in other countries, not in the US anymore...). Likewise spending should be indexed to GDP with 20% being the maximum. However we won't be seeing that in my lifetime...

you are correct. the gentleman responding to you is not. bastardizing a couple selectively chosen stats does not an argument make. the economy speaks for itself.

The problem with most discussions of the fiscal cliff is they discuss HOW to cut future deficits, i.e. the mix of spending cuts and tax increases, but they don't discuss WHEN to cut the deficit. The danger of the "fiscal cliff" is that current law calls for too much deficit reduction, too soon. The cliff is about WHEN, not HOW.

Mr. Reich is correct that we should continue fiscal and monetary stimulus in the short run until the economy fully recovers from the Great Recession. Only then should we phase in significant deficit reduction.

We can see the success of this approach historically:
-We set post WW II records for spending as a % of GDP in FY's 1981, 1982 and 1983, not stopping until ALL of the 2.7 million private sector jobs lost in the downturn of 1981-82 had been recovered. Only after the jobs were recovered did we reduce spending and raise taxes. The recovery continued after we reduced the fiscal stimulus. Government spending in FY 1983 at 23.5% of GDP was HIGHER than last year's 22.7%. In practice, President Reagan was more of a Keynesian than President Obama.
-In contrast, we tried to reduce the deficit in 1937-38 before we had fully recovered from the Great Depression. The result was a double dip recession. This is the approach House Republicans and the Tea Party have been championing for the last 3-4 years.

Mr. Reich is INCORRECT that we need to continue fiscal stimulus for the "foreseeable future." It is possible to estimate how long we need to continue fiscal stimulus.

We lost 8.8 million private sector jobs as a result of the Great Recession between 2/08 and 2/10, more than three times the lost jobs in the early 1980's. Since 3/10 we have recovered 5.1 million private sector jobs--more than enough to recover from any recession since the Great Depression--except this one. The jobs recovery is happening. It is just not complete yet. (See http://data.bls.gov/timeseries/CES0500000001. To highlight the loss and the recovery, set the date range from 2008 to 2012.)

Looking at the graph, it will take about another two years to fully recover the private sector jobs lost due to the Great Recession. Therefore, we should continue fiscal stimulus in FY's 2013 and 2014 and begin phasing in significant deficit reduction beginning in FY 2015. We might need to adjust this somewhat if things change, but FY 2015 provides a pretty good answer for WHEN to begin deficit reduction.

"I am for doing good to the poor, but I differ in opinion of the means. I think the best way of doing good to the poor, is not making them easy in poverty, but leading or driving them out of
it. In my youth I travelled much, and I observed in different countries, that the more public provisions were made for the poor, the less they provided for themselves, and of course became poorer. And, on the contrary, the less was done for them, the more they did for themselves, and became richer."

~ Benjamin Franklin

Keynesian Deficit spending did NOT work in the 1930's when there was 40-50% unemployment (25% men and 20-25% woman who, then, didn't do paid work--as compared to today)--why would it work today? Clue..it's not working.. $5 Trillion Dollars in deficits in recent years, and your only explanation is it wasn't enough" why do so many over intelligent people miss the obvious, and have no commonsense? You remind me of Lester Thurow , who said, in the 1980's "when japan was going to take over the world" again no common sense. There is always a "lack of demand" in a recession--that's why it''s a recession--artificial Government demand is no answer--the last 3 years have proven that again and again. The Stimulus program did zero, except debt, the federal Reserve saved the day
The reason for joblessness and slow growth is Your favorite person(President Carter--sorry I mean Obama) is the most likely reason--endless more regulations business bashing and other non productive left wing nonsense

As long as taxes go up on the rich I'm happy. That's why I voted for the man.

So you are a loser...... covetous, envious, jealous loser.

What good is a "good paying" job, if any accumulated wealth as a result of that hard work is devalued due to printing money to cover the deficits? Stinks of owing oneself to to the company store, but now the gov't is the company.

Mr. reich and I do use that word lightly are you out of your Fnnn mind? Money is cheap and we haven't spent enough? Of what, China's money? I am sure you have no kids to support any longer and can give a F about us struggling to take care of our own!!!! You limbs reap what you sow and are a complete disgrace and failure of moral and financial compass!!!

Robert, you are far better educated than I but also far "stupider". In isolation your debt addiction may have some merit, though I disagree with the magnitude you would advise; but......... we live in the real world. Deficit and debt are killing us at an ever increasing rate.

Your solution is like an old person who has been on blood thinner for 20 years, has an accident, is gushing blood and you want to double the thinner dose so as to preclude a stroke!

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