Democrats Forget What the Deficit Is Made Of

With the announcement this morning that the administration has a new proposal to cut spending by $20 billion for the rest of the fiscal year, the liberal blogosphere is generally agreeing that the final compromise will be about $30 billion in cuts. If that number sounds familiar, it may be because it’s the number Republicans originally proposed in February, before the Tea Party wing successfully convinced GOP leaders to push for more.

This is a shameful outcome, but the Democrats have no one to blame but themselves. From the beginning, they have played within the Republican terms of debate, never questioning the GOP orthodoxy’s line that the deficit is a spending problem and that it needs to be dealt with immediately. As Joseph Stiglitz, chairman of the Council of Economic Advisers under Bill Clinton, reminds us in an op-ed in Politico today, the continued economic recession is contributing to the deficit by dragging down government revenues while increasing outlays on automatic stabilizers like unemployment insurance.

The ballooning of the deficit since the crisis struck has understandably moved deficit reduction to the center of the debate. But the best way to reduce the deficit is to put America back to work. Overwhelmingly, the deficit increase has been caused by the enormous shortfall between the economy’s potential and actual output. Even as growth has resumed, the “output gap”—reflecting in high unemployment—has persisted.

What makes more sense, he says, is for the government to continue to stimulate a recovery, getting the economy growing again and putting people back to work. With interest rates at historic lows, it can afford to finance this stimulus, and it will get its investment back in the long run through increased income tax revenues. Instead Democrats are agreeing to a compromise that, in cutting only a trivial amount from the total annual deficit of $1.6 trillion, nonetheless has the potential to throw the country back into recession, creating further problems for government to deal with down the road. Democrats could have at least started from a strong position and moved more to the center but instead they have supported spending cuts from the start, with additional stimulus never making it to the table, let alone tax reform or cuts to wasteful defense spending. We can only hope that with their unequivocal loss in this fight, Democrats will learn to be more confident in their economic narrative in the coming spending debates, but based on their track record, I wouldn’t hold my breath.

Sarah Babbage is an intern with Demos. This piece is part of a series of articles and posts from Demos on Our Fiscal Security.