THE SHRINKING DEFICIT

ABSTRACT: The federal government’s annual budget deficit is falling, and falling faster than at any time since WWII. Overall government spending has been falling since 2007. Roughly 750,000 government jobs have been cut since the recovery began in 2009, cancelling out much of the benefit of increased private sector employment, and leaving unemployment higher than it would be otherwise.

Many economists believe that an austerity strategy of a rapidly declining deficit and spending cuts such as the “sequester” could hurt the economy and its recovery. Europe is experiencing a second recession and very high unemployment (12%) due to its austerity strategy. The current, irrational obsession with the deficit is precluding investments that have a high return and would improve the fiscal picture over the long-term.

Ultimately, jobs and a strong economy are the answer to taming the deficit, which is already shrinking rapidly.

FULL POST: The federal government’s annual budget deficit is falling. And it’s falling faster than at any time since the end of World War II. And that’s even before the March 1 spending cuts (the “sequester”) are factored in. [1] The deficit for this year is projected by the Congressional Budget Office to be $845 billion, down from $1,100 billion last year and $1,413 billion in 2009. It grew in 2008 and 2009 because the Great Recession led to 1) a dramatic loss of tax revenue due to decreased economic activity and jobs; [2] 2) increased expenditures for unemployment, food assistance, and other government benefits that softened the impact of the recession on families; and 3) tax cuts that were used to stimulate the economy, reducing the depth of the recession. [3]

Overall government spending, including the federal, state, and local levels, has been falling since 2007. Although the decline in federal spending in the fourth quarter of 2012 is seen as the culprit in causing the economy to shrink (i.e., negative growth) in that quarter, spending reductions and job losses have been most pronounced at the state and local levels. Federal spending has declined from 25.2% of our total economy or Gross Domestic Product (GDP) in 2009 to 22.8% in 2012, and is projected to fall to 21.5% by 2017 without any dramatic changes in budget policy. (The 40 year average has been 21.0%.)

Roughly 750,000 government jobs have been cut since the recovery began in 2009. This has been a “massive drag on the economy,” cancelling out much of the benefit of increased private sector employment. [4] Although the US unemployment rate has fallen to 7.7%, it would have fallen significantly further if these government jobs, including those of many teachers, had not been lost.

Many economists believe that an austerity strategy of a rapidly declining deficit and spending cuts such as the “sequester” could hurt the economy and its recovery. Historically, rapidly falling government deficits and spending have tended to lead to recessions. [5] If you want evidence of this, you need look no further than Europe at this moment. Europe is experiencing a second recession and very high unemployment (12%) due to its austerity strategy. Mark Cliffe, chief economist at IMG, describes its austerity strategy as “a bit of a vicious circle. Europe is pursuing a policy that is self-evidently failing.” [6]

The current, irrational obsession with the deficit (rather than a focus on creating jobs and strengthening the economy), is precluding investments in infrastructure and other activities that have a high return on investment and would improve the fiscal picture over the long-term. Especially given the federal government’s ability to borrow money at near zero interest rates, now is an ideal time to make investments in the future strength and growth of our economy, which is the best long-term strategy for reducing the deficit. [7]

There isn’t a good answer to the question of why the deficit – which is already rapidly falling – is more important now than creating jobs and strengthening the economy. [8] And if we look at Europe, we can see clear evidence that an austerity strategy does not lead to a falling deficit or a stronger economy with more jobs. The only answer is ideology – a belief that a smaller public sector is more important than putting struggling Americans back to work and back on their feet.

Ultimately, jobs and a strong economy are the answer to taming the deficit and the overall accumulated debt. Furthermore, a focus on creating jobs would resonate with the American public, many of whom are still struggling with the impacts of the Great Recession. It’s a matter of delivering a clear message about the need to create jobs and stimulate the economy, and that this will solve the issue of the deficit, which is already shrinking rapidly.


 

[1]       Klein, E., 2/12/13, “The deficit chart that should embarrass deficit hawks,” The Washington Post

[2]       Raum, T., 2/22/13, see above

[3]       Konczal, M., 1/22/13, “The most important graph on the deficit, “ The Roosevelt Institute

[4]       Raum, T., 2/22/13, “Government downsizes amid GOP demands for more cuts,” Associated Press (in the Reading Daily Times Chronicle)

[5]       Klein, E., 2/12/13, see above

[6]       The Balance Sheet, 4/3/13, “Europe’s austerity addiction,” The American Prospect

[7]       Summers, L., 1/21/13, “America’s deficits: The problem is more than fiscal,” The Washington Post

[8]       Wolf, M., 1/22/13, “America’s fiscal policy is not in crisis,” Financial Times

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