Tuesday, October 19, 2010

Spending Cuts Will Not Reduce the Deficit, Nor Fix Our Economy

Ezra Klein is quickly becoming one of the best at cutting through the noise -- on many issues, from health care reform, to tax policy and deficits -- generated by demagoguing teabag candidates and partisan gas bags.  In a concise post yesterday, he lays out in easily parsed terms why spending cuts are simply not the route to deficit reduction:
Our problem, put simply, is that our debt is growing faster than our economy. A lot faster. But you can't solve that by cutting spending or raising taxes. Those options will buy you time, but nothing more than that. Think of it this way: If you've got $1 trillion in debt and it's growing at 10 percent a year, you can cut $80 billion -- a huge cut in one year -- and be back to $1 trillion in debt by the next year. What matters is the growth rate, not the number.

That means the best way to solve your deficit problems is simple, at least in theory: Increase how fast your economy is growing. A one percentage point increase in your economy's growth rate is equal to about $2.5 trillion in new revenue over 10 years (not to mention it means you don't need as much social spending, as more people have jobs). To put that more concretely, whether we grow at 2 percent and 3.5 percent over the next 10 years means more to the deficit than whether we extend all of the Bush tax cuts or none of them.

The second best way to solve deficit problems is slow down how fast debt is growing. The big driver there is health-care costs, and so the honest answer on our debt problems is that we either need to wait and see how well the cost controls in health-care reform work, or we need to strengthen those cost controls and then wait and see how they work. We can raise taxes and cut spending to buy ourselves time, but the only sustainable answer is faster economic growth and slower debt growth. But we rarely talk about our debt problem in those terms, which means we rarely talk about it in a way that has any hope of solving it.
I don't expect Mike Lee or Morgan Philpot to change tact, nor that it'd make much difference in the narrative if their opponents challenged their rhetoric with a dose of intelligence.  Lee's campaign has -- obviously -- not been about winning minds, but praying on low-info voters, easily churned into wingnut rage.  But for the record, if nothing else, it's another great example of a simple truth of the 2010 race:

They understand teabagging... but not simple economics.  This isn't a war of ideas, this is Bullshit vs. the Real World.  And the real world, sadly, isn't winning in the Utah Senate race.

For those with more of a clue, early voting has begun.  Go fight Teh Stooped.

3 comments:

  1. I understand that argument, but it's the same one that Bush was making to justify exorbitant deficit spending. Sure, you can try and get the economy to grow faster than the deficit and thus reduce the debt-to-GDP ratio, but you still have the debt. If you can't get that under control somehow, you're in the same mess when (not if) the economy goes south. The entire argument depends on an economy that never stops growing, a practical and historical impossibility. You've gotta have something better than that. Your vacuum is no better than theirs.

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  2. bush was arguing from the other side of the laffer curve as well. the assumption being that decreasing taxes increases tax revenue thus closing the budgetary gap. so in addition to exorbitant spending he was cutting taxes, meaning that the tax base (in this case gdp) was growing, but the tax rate was shrinking, leaving the spending unpaid for. the key to shrinking the deficit and eventually the debt is to grow the tax base without cutting the tax rate.

    that doesn't mean that the economy can never stop growing, it means that in times of economic growth we pay off the debt rather than cutting taxes, so that in times of economic downturn we can afford a bit of deficit spending to get the economy going again.

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  3. I know I'd like to see debt paid off in good times and even some kind of national savings plan, but based on the past six or seven decades of budget numbers, I don't think that's a reasonable expectation. It seems that we raise spending to cover surpluses in good times and debt spend like mad in bad times. Any solution has to account for the real world; we can't always assume spherical objects in a vacuum.

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