What Deficit Hawks Got Wrong

After the first year of the Great Recession, focus on the current problem of a crumbling economy–where jobs are scarce and not as well paying–took a back seat to the focus on reducing the deficit and national debt. The largest cheerleader of this movement has been Fix the Debt which is made up of CEOs from large corporations and former prominent politicians. The organization has helped shift the focus of our leaders, too often ignoring ways to aid middle and lower class workers regain employment while also lowering our deficit and debt.

Fix the Debt and other organizations driven largely by debt reduction goals have made three main errors. First, they repeatedly mislead the public by focusing solely on debt while entirely ignoring counterbalancing assets. More destructively, they have abandoned the basic concept that a economy closer to full employment will lower government burdens and raise government revenues, thereby slashing short term deficits. Finally, the avenue they are taking to reform entitlements is politically more difficult than if they first focused on getting the economy back to full employment.

A focus on debt only becomes comprehensible when assets owned by the debtor are also taken into account. A millionaire is more capable of taking on $1 million of debt compared to someone who has $250k in assets. This holds true for the United States as well. No household and no business would measure debt solely and not consider at all what they had on the other side of the ledger: such an approach is fundamentally confused. Further, most investments are at least partially debt financed—very few homeowners pay cash up front for their new place, they get a mortgage. Similarly, if the US needs to make a large investment, be it in upgraded transportation infrastructure, new medicines or energy sources, or additional military equipment and readiness, such expenditure are in large measure investments that will create tangible assets behind them. In light of this, this chart demonstrates that America’s debt has never exceeded our assets: Federal Assets v. Debt

Furthermore, it should be the goal of any organization worried about the national debt to support getting the economy to full employment as quickly as possible. High employment can do wonders to a government’s revenues. One example of how higher employment helps is the case of Minnesota. In early 2012, the projected deficit for Minnesota’s 2014-2015 biennium budget was $2.2 billion with the effect of inflation on expenditures. Two years later the budget projections reversed with a $1.23 billion surplus. This turnaround could not have happened without large-scale job creation. Since the low point of the recession Minnesota has gained 152,000 jobs, dropping the unemployment rate from a high of 8.3% to 4.8%. This has allowed the state to refill its rainy day fund, cut taxes, and increase spending on needed infrastructure projects.

Finally the political climate is a bad one to pursue entitlement reform. Reforming the entitlement system is far more sensibly pursued when the economy is strong and there is less need for these benefits. A strong economy lessens the strain put upon these entitlement programs. With a strong employment environment there are less people using the welfare programs, less people on unemployment benefits, and less people applying for Social Security Disability Insurance. When the economy is stable we can better assess the debt and make the appropriate cuts while hurting less people. It is hard to argue, politically, why cuts to benefits need to be made when times are hard. It is much easier to make the arguments when the economy is near full capacity and the people in general feel more economically secure. Once the short term jobs crisis is properly handled, the long term debt challenges will be far more easy to address.

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