Hard Facts for Some People to Swallow

The budget debate is front and center now. As usual, people are arguing about all the wrong things. It's clear we have a budget deficit and that it poses a long run problem if we don't do something about it. It should be equally clear that we are going about a solution in the wrong way. There are some hard facts that a lot of people (including some who should know better) are finding hard to swallow.

1. The deficit is not due to run away government spending. It is due to the Bush recession. GDP has fallen so government revenue has fallen. This is the source of the bulk of the deficit. The only real measure of a problem with the deficit is relative to GDP. We have a problem now because so much productive capacity is currently unused.

2. This makes dealing with the recession by cutting spending the wrong solution. The medical profession gave up bloodletting centuries ago. How long will it take before politicians give up austerity as a solution to an economic downturn? Just like bloodletting, this makes the problem worse. History over the past 80 years shows clearly that fiscal stimulus backed by appropriate monetary policy will stimulate the economy. It also shows that taking them away has the opposite effect. The stimulus over the past few years worked--otherwise things would have been much worse--but it wasn't large enough to have a major impact on GDP due to the severity of the recession.

3. The government is not a business and can't be run like one in the large sense. The government exists largely because it supplies things that private enterprise can't--national defense, environmental protections, protection from discrimination... the list goes on. We'd all like to have maximum efficiency out of any enterprise--private or public. The government is an easy target, but there's not much evidence (outside of defense) that the government is any more poorly run than most large corporations. Cutting things like IRS enforcements--sure to reduce revenue-- and Social Security Administration--long known to be one of the most efficiently run agencies--is just dumb.

Until we wake up and start treating the disease rather than the symptoms, things are not going to get better. If the current drive towards austerity succeeds, we'll look back at this decade and wonder how we could have screwed up so badly. I, for one, don't want Congressional Republicans and Tea Partiers to learn a lesson through experience. That will be too hard on too many of us. I want them to study a little history, economics and politics before they start thinking they know how to make policy.