Thursday, June 10, 2010

What's more important? Cutting the deficit or spurring job growth?

That's the question for this week's Scripps Howard column. I take a slightly fatalistic approach:
Actually, the debate is already over. Americans may be worried about their jobs, but it's possible they're even crankier about the growing national debt. Politicians in Washington D.C. are responding accordingly, with President Obama even calling on most federal agencies to reduce their budgets by 5 percent. With a bipartisan deficit commission now on the job, those cuts may just be the beginning.

Perhaps that's as it should be: The bill for decades of deficit spending – in good times and bad, under both Republican and Democratic presidents – was going to come due sooner or later. It appears now may be the time. But Americans should understand one thing about the belt- tightening: It's gonna hurt.

Federal spending doesn't just prop up unpopular programs, after all: Right now, it's helping keep teachers and police officers on the job while states and cities deal with their own budget problems. Austerity will threaten such efforts. There is even talk the deficit commission will recommend big changes – and, perhaps, big cuts – to Social Security benefits. Americans won't like that one bit, but it's a logical result of efforts to bring spending under control.

The problem, as economist Paul Krugman explains, is that cutting spending during a recession is costly and ineffective. "Costly, because it depresses the economy further," he writes. "Ineffective, because by depressing the economy, fiscal contraction now reduces tax receipts."

So: Job growth or deficit reduction? Austerity now might give us very little of either. But it will still hurt a lot.


emawkc said...

I agree 100 percent with you on this. And you can add to this Federal belt tightening another 90 billion in "austerity" cuts among state governments.

As you say, it's the result of decades of overspending and entitlements. Very similar to what many European countries are going through right now.

You just simply can't spend money that you don't have.

Notorious Ph.D. said...

I disagree, emawkc: most of us spend money we don't have all the time. The trick comes in differentiating good debt from bad debt. I went over 70K in debt to finance an education that qualified me for the career I now have, and am likely to have for the rest of my life. Contrast this with the credit card I pulled out to buy two pair of $100 shoes this spring.

Spending -- even deficit spending -- is good when it can create growth or security. Spending to put out a fire is sometimes necessary. It's best to do it using the money you actually have. But sometimes that's just not practical.

Notorious Ph.D. said...

Sorry for double-dipping, but I realize that I forgot to include my thesis statement (Bad Ph.D.! Very bad!): Deficit spending is sometimes a good thing, but only if we can differentiate between needs and wants.

But this is the core of the problem -- we can't agree on what those mean. I would classify "new deal-style jobs program" as "need" (and thus debt worth incurring). Others might say "increased military spending" or "tax cuts."

emawkc said...


You are correct. I should have written "You just simply can't continuously spend money that you don't have."

Eventually you have to pay the piper, either by earning more money to pay back you debt, lowering your standard of living or defaulting on your debt (which has it's own set of costs).

namefromthepast said...

I contend that reducing the deficit can LEAD to job growth.

Good example is the failed stimulus. It only stimulated govt growth compared to the private sector.

A case is made by Keynes that the stimulus cycle can destroy private sector jobs(remember we were promised unemployment not to exceed 8%) thus lowering the tax revenues, then expanding the need for deficit spending, stimulus, lowering tax revenue, etc.

Krugman's recycled and unimaginative Fabian Socialist approach to economics wasn't proposed by Keynes to create private sector jobs.

Should we be surprised it has failed to meet it's stated objective?