Dealing with Our Debt Dilemma: Austerity vs. Stimulus

Those paying attention cannot help but feel frustrated by the inability of our Congress and President to come up with a long term debt solution.   According to the Congressional Budgeting Office (CBO), “by 2023,…. the publicly held federal debt will reach almost $20 trillion, nearly double 2012’s $11.3 trillion.” That figures to  stifle our economy and leave a huge financial burden to our descendents.   The trend is not our friend  (*1).

Wipe our Debt

Wipe our Debt (Photo credit: Images_of_Money)

Of course, much of the political wrangling has to do with gaining or losing advantage for either party, but often lost in that are real differences in points of view.  The two parties can’t make a deal because they see the problem differently.  On the right are those who believe the debt is our biggest problem and must be tackled right now (*2), while on the left, the belief is we must first develop a more robust economy and then later tackle the debt using the increased federal income stemming from that economy.   Cutting now would cut too deeply into social programs.

It boils down to those who favor austerity now and those who favor more government stimulus now, even though it adds to the debt.   The latter do not deny the debt issue, but believe it is not our top priority, while boosting the economy and creating more jobs is.   The former, especially the Tea Party, would argue that the promise of tackling the debt down the line is a fairy tale.   Our federal government has grown under both parties, an addiction it can’t break, like a life long smoker.  It needs to stop cold turkey…..or cool turkey.

Of course, there are some who advocate a combination of raised taxes and cuts in spending, a middle ground as represented by the Simpson/Bowles plan which adds revenue and makes budget cuts.  But there are two big flies in that ointment.  The Democrats don’t want to talk about reducing entitlements and the Republicans don’t want to talk about raising taxes, even more so now that the Bush tax cuts have been erased for those making $400,000 or more.   Those cuts were supposed to be temporary, so Democrats think of them as tax restoration, not hikes, but to Republicans, they are tax hikes.

Months back when Simpson/Bowles was introduced into the House hardly anyone on either side voted for it (*3).   That would have meant in upcoming elections, they would have had to defend both raising taxes and cutting spending.   Better to leave sleeping dogs lie, not for the country, but better for individual congressmen and their parties.

The one thing most on both sides can agree upon is that too much austerity too quickly would throw us back into recession.  That’s why Congress keeps working out last minute stop-gap measures, the proverbial kicking the can down the road.  Can we cut deficits without killing the recovery? is the question, and happens to be the title of an editorial by economic journalist Robert Samuelson.    He gives  a good overview of this dilemma in the Washington Post linked here: 

Samuelson sums up the potential problems of not reducing our deficits.   According to the CBO, increased federal debt “poses three dangers. The first is the financial crisis: Lenders might flee from buying Treasury debt. Second, large government borrowing could crowd out private investment and jeopardize future gains in living standards. Finally, the high debt might limit government’s ability to borrow heavily if a new need arises — from war, an economic crisis or natural disaster.

The exit from this dilemma…. is to time deficit reduction with a strengthening private-sector recovery. As private spending improves, cuts in government spending or tax increases would threaten the economy less.”

Nice trick if we can pull it off.   But it is hard to imagine our present Congress pulling off anything that tricky, isn’t it?   If they could, we wouldn’t be facing another “sequester” deadline next month.   The idea of the “sequester” back in August, 2011 was that the threat of across the board cuts in our federal budget would force both parties to come to a more sensible compromise.  But, many months later, all it has forced them to do so far is to extend the deadline for those cuts to March 2.

I imagine the President will address this in his State of the Union speech this Tuesday, but it is guesswork as to what will actually happen between now and the March deadline.   Given recent history, I can’t imagine a real step forward taking place, unless “cutting the budget with an ax rather than a scalpel” (an oft used comparison) winds up being a step forward some how.    I don’t know where it would be a step to.   Perhaps after the cuts were made, Congress could agree on selectively restoring some funding.

On the other hand, putting off the deadline once again would make me recall the fairy tale of the boy who called wolf.   A deadline is supposed to mean something.  If this keeps up “deadline” will become a laugh line.

Whatever Congress winds up doing or not seems likely to add new meaning to the term March Madness.

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(*1)   Debt as a share of the economy would rise from 2012’s 73 percent of gross domestic product (GDP) to 77 percent in 2o23.  Though a bad trend, it may not seem as frightening as the other stat, unless one adds that debt/GDP ratio was 36 percent in 2007.  The hay day before the mortgage meltdown.

(*2)  The liberal economist Paul Krugman (note link on my Blogroll above) has argued that Republicans do not really care about the debt, that it has been a political ploy.  Certainly the last  Bush administration wasn’t concerned about the debt.   But other highly respected economists and business leaders think Krugman underestimates the dangers of our deepening debt.

(*3)  Paul Krugman has also argued Simpson/Bowles is a bad plan anyway, but perhaps even a “bad” plan is better than no plan at all, which is where we are.  Also, as I will elaborate upon later, whatever plan Krugman might like would not have a shot of getting through Congress, even though he is a brilliant economist who may be right.  I will return to this in a later post.

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