We know that the Republicans in Congress are using the debt limit debate to try to kill Medicare. The vast majority of Congressional Republicans (all but four House Republicans and 40 Senate Republicans) are on the record, having voted for the Paul Ryan plan to kill Medicare. John Boehner, after inexplicably making his caucus vote to kill Medicare is now crowing that raising the debt limit will require trillions in cuts.
On the other hand, we have hotheads on sites like Firedoglake calling President Obama dumb and the rest of the left puritan whackjobs singing in unison deriding the president's deficit commission as "catfood commission" and refusing to seriously look at any of their proposals. Basically, the ideological Left wants a federal jobs program, has no idea how to come up with the votes for it in Congress, and wants to bash President Obama anyway.
In essence, the media and the reactionaries have created two polls of this debate, both wrong. The first, the Right, purports to believe that deficit and spending reduction is the primary goal in and of itself, and it should be done without regard to how it affects ordinary citizens. They also believe this to be an opportunity to destroy social safety nets they have always seen as immoral. Oh, but you can't raise taxes on multinational corporations, tax cheats or the super rich, according to this crowd. The second crowd, consisting of the Left reactionaries, argues that deficits do not matter at all, severe deficits are not bad for the economy, and that fiscal responsibility is a goal contrary to economic growth.
Why the Right gets it wrong.
It's pretty easy to understand why the Right is, well, wrong. It's intuitive for those of us who are liberals and progressives. We correctly recognize it as supply side economic theory, proven to be wrong. If supply side economics had any merit, the economic pain from the crisis would already be gone, given corporations are sitting on $1.6 trillion in cash. Businesses don't hire because they have money burning a hole in their pocket, even when there is money burning a hole in their pocket. They hire when consumers demand their product and they need to produce more. At a time when consumers are holding back on spending thanks to high gas prices, job market uncertainty and the lag on their personal savings and wealth, demand must be infused into the economy in order to get it going. Blind deficit cutting cuts out critical investments in our education and infrastructure, needed public services, and insurance programs that not just Americans but the economy relies on for cushion.
Without Medicare taking care of most senior's medical needs, their consumer demand would be severely reduced. If, as Ryan's kill-Medicare budget suggests, 33 average seniors had to foot an extra $6,000 each for their own health insurance so that the average millionaire could receive a $200,000 in tax cuts, that is $6,000 less each of those seniors have to spend buying groceries, clothes, maybe a vacation and something for their grand kids. On the other hand, very little of the extra $200,000 the average millionaire would get would actually be spent in the consumer market, given that millionaires aren't exactly cash strapped for the things they want.
Without unemployment insurance, not only would more people be on the streets, consumer spending would also plummet as the unemployed spend almost all of their checks buying necessities. Without stimulus, demand would not be infused and the economy would continue on a spiral downward.
Why the Purity Left doesn't get it.
So that's the Right and why they get it wrong. But what about the Purity Left? What don't they get? They are right that demand is the most important thing in our economy and that the government should not be reducing real demand in the economy at a time of stress. However, first thing they don't get is that massive federal debt and deficit can in of itself be a drain on demand.
What? How? I have pointed to this before in my columns, but the first thing you need to look at to see how demand is reduced in our economy by the means of debt is interest payment. In fiscal year 2010, the United States treasury paid nearly $200 billion in interest on the national debt, and this year it's paying a lot more. What do we get for the interest payment? Does it fund education? Unemployment benefits? Health care? Jobs? Infrastructure? Nope. It funds nothing. And it's as much or more than the budgets of the HHS, the VA, and the Transportation Department combined (which are the three highest funded departments after Defense). Heck, our debt payment in 2010 was about the combined amount of the payroll tax cut and unemployment extension that President Obama delivered to you as part of the tax deal last year.
If you think $200 billion in interest payments is a lot, you ain't seen nothing yet.
The Congressional Budget Office (CBO) projects that, under current law, debt held by the public will exceed $16 trillion by 2020, reaching nearly 70 percent of GDP. CBO also projects that interest rates will go up. The combination of rising debt and rising interest rates is projected to cause net interest payments to balloon to nearly $800 billion, or 3.4 percent of GDP, by 2020.In a fairly short period of time, the interest on our national debt is going to become the largest discretionary budget item, and it's not all that discretionary. I don't know about you, but pouring nearly $1 trillion a year into interest payments, for which we get no economic activity, does not sound all that progressive to me.
The other ill effect of exploding debt is that interest rates are bound to go up. Why? Because the government borrows money from the same place you and I do. The more the government has to borrow, the less available for consumer and small business borrowing. We have a demand based economy, but once the demand is there businesses - especially small businesses - must have the financing available to them to make the products that are being demanded and hire the people they need. It's not just businesses either. Interest rates play a role on the demand side as well. The most commonly paid consumer interest is on credit cards, store cards, etc., as well as mortgages. Make consumer credit more expensive and you make it less available, creating additional drag on demand.
So while short term and well targeted deficit spending can be good for economic bursts, long term, sustained debt will, economically speaking, harm the economy.
Beyond direct economic harm, progressives need to familiarize ourselves in the real world about how governments - state and federal works. Most states are required to balance their budgets. Periods of economic stress reduces their revenues and skyrockets the need for their social services. The effect is the same on the federal government. However, the fact of the matter is both political and practical binds keep the federal government from being able to finance all social services for everyone. In every budget crisis, the most needy are always the most affected as budget cuts take place, which has its own adverse economic impact. The more in debt the federal government is, the less likely it is to help the states. If we want to protect the services we want, we must be prudent stewards of taxpayer money and eliminate waste, eliminate programs that aren't working, focus on effective and efficient government, and find ways to reduce the deficit.
President Clinton balanced the budget. Howard Dean, when he was governor, insisted on balancing his budgets even though Vermont was not Constitutionally required to, and many liberals blamed him for being too tough fiscally. But because of his tough fiscal responsibility, he was able to deliver things like near-universal health coverage in Vermont. As President Obama said, if you want government to be providing services, you better be able to prove that government can be a good steward of taxpayer money. Large, sustained deficits undermine public trust in our government, which erodes support for worthy programs.
The far Right tea party believes that the deficit is the only thing that matters; that spending should be cut with a hatchet regardless of who it hurts (well, except them). Conservative far Right politicians and reactionaries carry the banner of an agenda to eliminate our social compact. Deficit reduction for them is an end in and of itself on ideological grounds, and a means to end the social compacts. Their anti-government ideology drives their anti-spending rhetoric. But the ideological, puritan Left actually aides the argument of the Tea Party right by denying that there is any need for fiscal responsibility at all in a time of economic difficulty. It aides the argument that government, if guided by progressives, would be lacklaster in spending taxpayer funds. You simply cannot tell taxpayers that the stewardship and efficient use of the resources they provide the government is not important.
While the far Right argues that cutting spending is the only thing that matters, the ideological Left pretends that deficits don't at all matter. The truth is that we can afford neither to ignore our deficits nor to harm our most important investments or our social compacts in the process of reducing our deficit. We can and must be smart about reducing our deficit, protecting our investments and getting rid of programs and funding that do not work or serve a broad, critical purpose. We need to get smart about this.