Sunday, May 22, 2011

Buying the deficit charade

Isaiah Poole, commenting in the Campaign for America's Future on an article by Ruy Teixeira, says the current fixation on the deficit and debt doesn't make sense economically or politically (as in doing what constituents want to get elected again).

The GOP has decided cutting the deficit (thereby shrinking government) is their top priority. That goal is wanted by their corporate backers.

But the American people want jobs. They do not see deficit cutting as a way of creating jobs.

So the GOP constantly goes into hysterics over the budget in hopes of moving public opinion. Sadly, much of mainstream media (including NPR), now take the budget problem as their baseline. The GOP wants so much media coverage of the budget there is a news vacuum on everything else so that the public will blame the lack of jobs on the prez.

It seems the public isn't buying this charade. Alas, there is one group that is buying -- Democrats in Washington. The GOP has convinced them that the budget problem is so severe that foreign investors are about to lose confidence, reducing America to an impoverished country. Therefore the deficit is a bigger problem to these Dems than jobs.

And in 2012 voters will look at the job situation and vote for the party that is fighting for them. If they decide it is neither (the way it looks now), they'll stay home, handing the election to the party with the most tenacious voters.

Economist Kash Mansouri, writing in his blog The Street Light, takes a look at what happens when austerity is imposed in an attempt to reduce the government budget deficit. It has some math in it (which I'll let my friend and debate partner enjoy) so I won't go into specifics. In general, as the government spends less, citizens supported by the government also spend less. In addition, the gov't gets less tax revenue. This is a multiplier effect. The deficit actually increases. To reduce a $5 deficit (the example uses nice small numbers) the government must actually cut $9 and the economy takes a $14 hit. Both Britain and Greece are attempting austerity budgets and keep missing their targets.

Solution -- don't rely on confidence fairies. The gov't must boost spending to boost the economy. Only in prosperous times can the deficit be trimmed.

There are several comments to this article, but I can't tell if the arguments are genuine or the disputers are GOP sympathizers trying to discredit the post.

Brad DeLong, professor of Economics writing in his personal blog, says Mansouri left out a term in his equation. Reducing spending may also cause a permanent reduction potential output. That makes the situation even worse. on the flip side, we are in an ideal position (low interest rates) to stimulate the economy to great benefit.

Some of DeLong's commenters predict how the politics will play out. The GOP enacts at least some level of austerity. The deficit (according to the math here) increases. The GOP makes sure Obama gets blamed for increasing the deficit.

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