Republican Deficits vs. Democratic Deficits
President Obama's rebuff on stimulus spending by the G-20 and the latest Republican roadblock on the Senate jobs bill is producing fears of a deeper, double-dip global recession. While Thomas Frank urged the U.S. to avoid the "austerity trap," Paul Krugman warned that the "pain caucus" here and in Europe could produce the "Third Depression."
But behind the tidal wave of austerity fever threatening to wash away the U.S. recovery is a fundamental split between the two parties on when and why the federal government should run up deficits in the first place. Simply put, Republicans embraced massive deficits during times of prosperity, while Democrats turned to deficit spending to fight the recessions and economic hardship the GOP helped produce.
That's the record of the past generation. Under Republican leadership, economic common sense was upended. The national debt tripled under Ronald Reagan and, after the budget surpluses of the later Clinton years, doubled again under George W. Bush. As analyses from the Center on Budget and Policy Priorities show, the Bush tax cuts accounted for almost half the mushrooming deficits during the last decade and, if made permanent, over the next 10 years would produce more red ink over than two wars, TARP, the Obama stimulus package and the revenue lost to the recession combined.
That Republican "debt orgy," as Senator Sheldon Whitehouse (D-RI) aptly labeled it, largely served to produce a massive transfer of wealth to the richest Americans needing it least. (That perverse development is reflected in "the Bush 400", the richest 400 taxpayers in the United States who saw their incomes double and tax rates halved between 2001 and 2007.) As the New York Times' David Leonhardt noted last year, that windfall for the wealthy, the Medicare prescription program, and the wars in Afghanistan and Iraq were never paid for:
"President Obama's agenda, ambitious as it may be, is responsible for only a sliver of the deficits, despite what many of his Republican critics are saying...
The economic growth under George W. Bush did not generate nearly enough tax revenue to pay for his agenda, which included tax cuts, the Iraq war, and Medicare prescription drug coverage."
For House Minority Leader John Boehner, who voted for all of it, the answer isn't a return to the moderately higher tax rates of the prosperous Clinton years, but slashng Social Security. As he told the Pittsburgh Tribune Review, Boehner not only supports raising the retirement age over time (a suggestion offered by many in both parties), but means-testing the universal retirement program:
"We need to look at the American people and explain to them that we're broke," Boehner said. "If you have substantial non-Social Security income while you're retired, why are we paying you at a time when we're broke? We just need to be honest with people."
Last fall, former Reagan Treasury official Bruce Bartlett offered just that kind of honesty to the born again deficit virgins of his Republican Party. Noting that the FY2009 deficit of $1.4 trillion was solely due to lower tax revenues and not increased spending, Bartlett concluded:
"I think there are grounds on which to criticize the Obama administration's anti-recession actions. But spending too much is not one of them. Indeed, based on this analysis, it is pretty obvious that spending - real spending on things like public works - has been grossly inadequate. The idea that Reagan-style tax cuts would have done anything is just nuts."
As for the Bush tax cuts, the Congressional Budget Office (CBO) today made clear what the impact of making them permanent. In its Long Term Budget Outlook, the CBO offered two scenarios - grim and grimmer - for the nation's fiscal future. Its director Doug Elmendorf opened by noting the devastating wallop of the recession while emphasizing:
The sharp rise in debt stems partly from lower tax revenues and higher federal spending related to the recent severe recession and turmoil in financial markets. However, the growing debt also reflects an imbalance between spending and revenues that predated those economic developments.
While highlighting the growing contributions that Social Security, Medicare, and mandated health care programs will make to the debt picture, Elmendorf painted a dismal picture of an "alternative fiscal scenario" in which "most of the provisions of the 2001 and 2003 tax cuts would be extended."
Under that combination of policy assumptions, federal debt would grow much more rapidly than under the extended-baseline scenario. With significantly lower revenues and higher outlays, debt would reach 87 percent of GDP by 2020, CBO projects. After that, the growing imbalance between revenues and noninterest spending, combined with spiraling interest payments, would swiftly push debt to unsustainable levels. Debt as a share of GDP would exceed its historical peak of 109 percent by 2025 and would reach 185 percent in 2035.
As Ezra Klein and Matthew Yglesias suggest, the CBO's latest forecast makes clear that the very worst thing the Congress could do to trim the deficit is make the expiriing Bush tax cuts permanent:
In the United States, the champions of austerity now are clearly ascendant. But across the pond in Europe, Ireland and the UK are showing what happens when government cuts too much, too soon. On Monday, the New York Times described "In Ireland, a Picture of the High Cost of Austerity," which prompted Paul Krugman to reflect:
"Ireland has imposed savage cuts in public spending, only to be treated by the markets as a worse risk than Spain, which has been far more reluctant to take the hard-liners' medicine."
In Britain, last week the new conservative government of Prime Minister David Cameron unveiled a draconian package of spending cuts and tax increases to attack its massive deficit. But as the Guardian reported today, Cameron's Chancellor of the Exchequer "gave no hint last week about the likely effect of his emergency measures on the labour market." That impact?
George Osborne's austerity budget will result in the loss of up to 1.3m jobs across the economy over the next five years according to a private Treasury assessment of the planned spending cuts...
Unpublished estimates of the impact of the biggest squeeze on public spending since the second world war show that the government is expecting between 500,000 and 600,000 jobs to go in the public sector and between 600,000 and 700,000 to disappear in the private sector by 2015.
With the economy here growing slowly and poised to shed jobs in June (even with, as Leonhardt charted today, some promising signs), the United States simply can't afford to slam the brakes on the recovery. As Franklin Roosevelt's painful second-term experience showed ("From 1936 to 1938, when the Roosevelt administration believed that the Great Depression was largely over, tax increases and spending declines combined to equal 5 percent of gross domestic product"), this is not the time to shut off the spigot of federal stimulus. Not now, not yet.
When it comes to the recession, the recovery and deficit spending, America's mantra should be that of St. Augustine:
"Give me chastity and continence, but not yet."
As for the new-found fiscal discipline of the Republicans, it is worth remembering they dug this deficit hole when times were relatively good. Theirs is the austerity of dope. Now that times are tough, Democrats need to keep spending if we're going to get out of them.