The Complicated Relationship Between Spending and Deficits
To the average joe, the concept of higher government spending shrinking rather than enlarging deficits is counterintuitive. Nonetheless, particularly in a recession, there is a fairly strong consensus that the notion is true. Yes, when Obama signed the American Recovery and Reconstruction Act, otherwise known as the stimulus, in the spring of 2009, it immediately added over $800 billion to the deficit and in the next two fiscal years, deficits rose as high as $1.7 trillion for a single year. However, nonpartisan economists calculated what the deficit would have been without the infusion of stimulus dollars and concluded the number would have been nearly twice as large at $2.7 trillion.
How is this possible? Because government was the only entity capable of infusing capital into an economy that shrunk at a jaw-dropping rate of 9% in the fourth quarter of 2008. The loss of economic activity was significant even with that infusion of government dollars, but without it, the shrinkage of economic activity would have been even more severe and revenue would have come far beyond projections. Add on to that the layoffs of government employees and the trickle-down effect of that and you're looking at longer unemployment lines and less consumerism.....and the end result is massive debt.
Most economists who aren't cynical hacks gaming for the Republican Party's short-term political benefit would agree with the above comments. Indeed, the consensus opinion is that the biggest obstacle to our recovery now is that balanced budget requirements are forcing state and local governments to continue to cut services and lay off middle-class employees. Last quarter's economic growth of 2.8% was said to have been 3.7% if not for the continued extraction of public sector dollars from the economy. And if the economy grows by 3.7%, revenues come in at much higher dollar figures than they do when the economy grows by 2.8%. And that means smaller deficits.
While this is conventional wisdom among mainstream economists, it's not easy to explain to the public, who typically view government spending as a zero-sum game (every dollar spent is a dollar lost, adding to the deficit) and are thus easy prey for Republican demagogues trying to score political points in the cheapest possible way. Yet curiously, even those who get the upside of government spending's multiplier effect in inducing economic activity seem to be card-carrying members of the flat earth society when it comes to long-term entitlement spending and its effect on deficits.
Now I'm definitely not going to deny that Social Security and especially Medicare are unaffordable. Reform is necessary, but the most practical means of cutting long-term entitlements is also the most politically untenable...the rationing of Medicare services and the acknowledgment that people who could otherwise have lived marginally longer will not because of denied care. That's a tough sacrifice, but the alternative is the country going bankrupt.
But back to my main point, all of the economists and media smart guys seem to agree with proposals like Simpson-Bowles and even more draconian cuts to Social Security, failing to acknowledge that such cuts will be accompanied with loss of economic activity the same way that cutting government programs is slowing our recovery today. This would be true even in previous more bullish investment eras where most workers had defined-benefit pensions and their personal savings accrued interest rates above the current rate of 0%.
By contrast, Americans today are experiencing declining wages and are thus more likely to be living paycheck to paycheck and unable to save a penny. And even those who can afford to save see their savings wiped out and then some when educating their kids at colleges with tuition rising exponentially higher than the rate of inflation. They're also dealing with 401Ks (the worthless "unpensions") that have less value today than they did in 1999, interest rates so low that non-stock investments accrue virtually no return on investment year to year, and homes that have declined in value by half over the last few years. The overwhelming majority of Americans, despite feverish planning and preparation, are light years away from being prepared to finance a retirement, and when you consider that they are the fastest-growing group of Americans, this lack of preparation forecasts a serious loss of economic activity on the horizon.
That means Social Security is poised to be more important than ever in keeping the economy afloat and providing a base level of purchasing power for elderly consumers. Yet the politicians and the experts left, right, and center in American politics think it needs to be cut....in the interest of trimming the deficit. Has nobody really thought things through this far? Does a nation of old people living in poverty really seem like a scenario that would bring about deficit reduction?
The point is that there is no silver bullet to reduce our cycle of debt and the long-term financial turmoil that will come with it. If we don't cut entitlements, the simple arithmetic of more senior citizens extracting services from a smaller group of workers financing them breaks down. But if we do cut entitlements, seniors will be living in extreme financial duress and the rate of economic growth will plunge as their economic activity is erased along with their income....and deficits will still grow larger and larger. I guess this is why all societies seem to fall at some point as the time comes where there are no good options to proceed.
How is this possible? Because government was the only entity capable of infusing capital into an economy that shrunk at a jaw-dropping rate of 9% in the fourth quarter of 2008. The loss of economic activity was significant even with that infusion of government dollars, but without it, the shrinkage of economic activity would have been even more severe and revenue would have come far beyond projections. Add on to that the layoffs of government employees and the trickle-down effect of that and you're looking at longer unemployment lines and less consumerism.....and the end result is massive debt.
Most economists who aren't cynical hacks gaming for the Republican Party's short-term political benefit would agree with the above comments. Indeed, the consensus opinion is that the biggest obstacle to our recovery now is that balanced budget requirements are forcing state and local governments to continue to cut services and lay off middle-class employees. Last quarter's economic growth of 2.8% was said to have been 3.7% if not for the continued extraction of public sector dollars from the economy. And if the economy grows by 3.7%, revenues come in at much higher dollar figures than they do when the economy grows by 2.8%. And that means smaller deficits.
While this is conventional wisdom among mainstream economists, it's not easy to explain to the public, who typically view government spending as a zero-sum game (every dollar spent is a dollar lost, adding to the deficit) and are thus easy prey for Republican demagogues trying to score political points in the cheapest possible way. Yet curiously, even those who get the upside of government spending's multiplier effect in inducing economic activity seem to be card-carrying members of the flat earth society when it comes to long-term entitlement spending and its effect on deficits.
Now I'm definitely not going to deny that Social Security and especially Medicare are unaffordable. Reform is necessary, but the most practical means of cutting long-term entitlements is also the most politically untenable...the rationing of Medicare services and the acknowledgment that people who could otherwise have lived marginally longer will not because of denied care. That's a tough sacrifice, but the alternative is the country going bankrupt.
But back to my main point, all of the economists and media smart guys seem to agree with proposals like Simpson-Bowles and even more draconian cuts to Social Security, failing to acknowledge that such cuts will be accompanied with loss of economic activity the same way that cutting government programs is slowing our recovery today. This would be true even in previous more bullish investment eras where most workers had defined-benefit pensions and their personal savings accrued interest rates above the current rate of 0%.
By contrast, Americans today are experiencing declining wages and are thus more likely to be living paycheck to paycheck and unable to save a penny. And even those who can afford to save see their savings wiped out and then some when educating their kids at colleges with tuition rising exponentially higher than the rate of inflation. They're also dealing with 401Ks (the worthless "unpensions") that have less value today than they did in 1999, interest rates so low that non-stock investments accrue virtually no return on investment year to year, and homes that have declined in value by half over the last few years. The overwhelming majority of Americans, despite feverish planning and preparation, are light years away from being prepared to finance a retirement, and when you consider that they are the fastest-growing group of Americans, this lack of preparation forecasts a serious loss of economic activity on the horizon.
That means Social Security is poised to be more important than ever in keeping the economy afloat and providing a base level of purchasing power for elderly consumers. Yet the politicians and the experts left, right, and center in American politics think it needs to be cut....in the interest of trimming the deficit. Has nobody really thought things through this far? Does a nation of old people living in poverty really seem like a scenario that would bring about deficit reduction?
The point is that there is no silver bullet to reduce our cycle of debt and the long-term financial turmoil that will come with it. If we don't cut entitlements, the simple arithmetic of more senior citizens extracting services from a smaller group of workers financing them breaks down. But if we do cut entitlements, seniors will be living in extreme financial duress and the rate of economic growth will plunge as their economic activity is erased along with their income....and deficits will still grow larger and larger. I guess this is why all societies seem to fall at some point as the time comes where there are no good options to proceed.
posted by Mark at 7:01 PM
0 Comments:
Post a Comment
<< Home