Fiscal balance is a false economy
Monday, 2 July 2007
Robert Reich
A quiet but important debate is breaking out inside the Democratic party. It will largely determine whether the Democrats, should they win back the White House in 2008 and maintain majorities in Congress - as seems increasingly likely - will have enough revenue to do the things that need to be done in the nation. The debate is over the importance of reducing the budget deficit and the goal of a balanced budget.
In many ways it is a continuation of a debate that began at the start of the Clinton administration. The difference is that then the budget deficit hovered at about 5.0 per cent of US gross domestic product and there was broad consensus it had to be reduced. Now, the budget deficit represents only around 2.0 per cent of GDP, close to its historical norm. Yet it has become an article of faith among some Democrats that fiscal prudence is a necessary precondition for economic health.
Indeed, congressional Democrats have re instituted what are known as "pay-go" rules, requiring that new expenditures or tax cuts be offset by corresponding spending cuts or tax increases elsewhere. The Democrats' proposed federal budget for the next fiscal year avows a commitment to reduce the budget deficit still further.
The Democrats' presidential candidates are in a fiscal straitjacket. They are promising to address America's sluggish wage growth and widening inequality by fixing the schools, providing affordable healthcare to all, repairing the nation's infrastructure and leading the US towards new energy technologies, while also protecting Social Security retirement accounts, being tough on national defence and homeland security. But they do not want to raise taxes, apart from rolling back President George W. Bush's temporary tax cuts that have gone mainly to the richest Americans. How can they accomplish all this while still guaranteeing fiscal austerity?
When Bill Clinton was elected he promised to reduce America's two deficits - the budget deficit and the growing deficit of public investment in schools, healthcare, infrastructure and environment. But the budget deficit was much larger than expected. Hence, he put the investment deficit on hold. It remained on hold for the next . . . well, it has now been 14 years.
In the late 1990s, when the budget deficit turned into a fat budget surplus, President Clinton again ignored his original investment agenda. The recovery was strong enough to pretend that the problems of widening inequality and stagnant median wages were behind us.
During the 1996 campaign, rather than return to his investment agenda, he told Americans the economy had never been as good and would only get better. Then, worried that Republicans would try to turn the surplus into tax cuts, Mr Clinton used the scare tactic of telling the nation to "save Social Security first". By 2000, as budget surpluses mounted, candidate Al Gore proposed they bereserved for baby bombers' Social Security. When the surpluses still overflowed, Mr Gore said they should be used to cut national debt.
The investment agenda had disappeared. Thus did Mr Clinton and Mr Gore tee up a $5,000bn 10-year surplus for Mr Bush to give away mostly to America's very wealthy without the nation ever considering it might be used to finance what Mr Clinton and Mr Gore were elected to do in 1992.
Democrats had become the official party of fiscal austerity. Fast forward to now. The nation's investment deficit is now much larger than it was in 1992. The "No Child Left Behind Act" raised school standards but did not provide enough money to implement them. There is less money for job training, and it is harder for families of modest means to afford college for their kids. Millions more Americans lack health insurance than in the early 1990s. And, according to a recent report from the American Society of Civil Engineers, the roads, bridges, transit, drinking water systems and power grids are in worse shape than 15 years ago.
Mr Bush has put rich people and big corporations first. Yet as a percentage of GDP the budget deficit is now far less than in the early 1990s. If we cut corporate welfare, raised taxes on the richest Americans, and allowed the deficit to move up to 3.0 per cent of GDP then there would be plenty of money to invest in the nation's future.
Yet congressional Democrats have learnt the wrong lesson from the 1990s. They have concluded that cutting budget deficits and balancing budgets is a sure-fire formula for widespread prosperity. Flush from their mid-term victory, they have flung themselves headlong into the guillotine of fiscal austerity. Their "pay-go" rules make it impossible for them to do much of anything without raising taxes, yet they have been unwilling to commit themselves to raising taxes on the rich.
Democratic presidential candidates have been assiduously vague about how to finance their plans. John Edwards has suggested that he is not over-concerned about budget deficits but has provided few details. Hillary Clinton and Barack Obama have so far avoided bold ideas that will cost real money. None has offered specific budget numbers. All are careful to sound as if they believe that fiscal privation is the road to salvation.
Mr Clinton had it right in 1992. Inadequate public investment in the nation's future will condemn us to slower growth and shrinking prosperity. It is already happening.
(The writer is professor of public policy at the University of California at Berkeley, former US secretary of labour and author of the coming Super capitalism)
............................................
— FT Syndication Service
A quiet but important debate is breaking out inside the Democratic party. It will largely determine whether the Democrats, should they win back the White House in 2008 and maintain majorities in Congress - as seems increasingly likely - will have enough revenue to do the things that need to be done in the nation. The debate is over the importance of reducing the budget deficit and the goal of a balanced budget.
In many ways it is a continuation of a debate that began at the start of the Clinton administration. The difference is that then the budget deficit hovered at about 5.0 per cent of US gross domestic product and there was broad consensus it had to be reduced. Now, the budget deficit represents only around 2.0 per cent of GDP, close to its historical norm. Yet it has become an article of faith among some Democrats that fiscal prudence is a necessary precondition for economic health.
Indeed, congressional Democrats have re instituted what are known as "pay-go" rules, requiring that new expenditures or tax cuts be offset by corresponding spending cuts or tax increases elsewhere. The Democrats' proposed federal budget for the next fiscal year avows a commitment to reduce the budget deficit still further.
The Democrats' presidential candidates are in a fiscal straitjacket. They are promising to address America's sluggish wage growth and widening inequality by fixing the schools, providing affordable healthcare to all, repairing the nation's infrastructure and leading the US towards new energy technologies, while also protecting Social Security retirement accounts, being tough on national defence and homeland security. But they do not want to raise taxes, apart from rolling back President George W. Bush's temporary tax cuts that have gone mainly to the richest Americans. How can they accomplish all this while still guaranteeing fiscal austerity?
When Bill Clinton was elected he promised to reduce America's two deficits - the budget deficit and the growing deficit of public investment in schools, healthcare, infrastructure and environment. But the budget deficit was much larger than expected. Hence, he put the investment deficit on hold. It remained on hold for the next . . . well, it has now been 14 years.
In the late 1990s, when the budget deficit turned into a fat budget surplus, President Clinton again ignored his original investment agenda. The recovery was strong enough to pretend that the problems of widening inequality and stagnant median wages were behind us.
During the 1996 campaign, rather than return to his investment agenda, he told Americans the economy had never been as good and would only get better. Then, worried that Republicans would try to turn the surplus into tax cuts, Mr Clinton used the scare tactic of telling the nation to "save Social Security first". By 2000, as budget surpluses mounted, candidate Al Gore proposed they bereserved for baby bombers' Social Security. When the surpluses still overflowed, Mr Gore said they should be used to cut national debt.
The investment agenda had disappeared. Thus did Mr Clinton and Mr Gore tee up a $5,000bn 10-year surplus for Mr Bush to give away mostly to America's very wealthy without the nation ever considering it might be used to finance what Mr Clinton and Mr Gore were elected to do in 1992.
Democrats had become the official party of fiscal austerity. Fast forward to now. The nation's investment deficit is now much larger than it was in 1992. The "No Child Left Behind Act" raised school standards but did not provide enough money to implement them. There is less money for job training, and it is harder for families of modest means to afford college for their kids. Millions more Americans lack health insurance than in the early 1990s. And, according to a recent report from the American Society of Civil Engineers, the roads, bridges, transit, drinking water systems and power grids are in worse shape than 15 years ago.
Mr Bush has put rich people and big corporations first. Yet as a percentage of GDP the budget deficit is now far less than in the early 1990s. If we cut corporate welfare, raised taxes on the richest Americans, and allowed the deficit to move up to 3.0 per cent of GDP then there would be plenty of money to invest in the nation's future.
Yet congressional Democrats have learnt the wrong lesson from the 1990s. They have concluded that cutting budget deficits and balancing budgets is a sure-fire formula for widespread prosperity. Flush from their mid-term victory, they have flung themselves headlong into the guillotine of fiscal austerity. Their "pay-go" rules make it impossible for them to do much of anything without raising taxes, yet they have been unwilling to commit themselves to raising taxes on the rich.
Democratic presidential candidates have been assiduously vague about how to finance their plans. John Edwards has suggested that he is not over-concerned about budget deficits but has provided few details. Hillary Clinton and Barack Obama have so far avoided bold ideas that will cost real money. None has offered specific budget numbers. All are careful to sound as if they believe that fiscal privation is the road to salvation.
Mr Clinton had it right in 1992. Inadequate public investment in the nation's future will condemn us to slower growth and shrinking prosperity. It is already happening.
(The writer is professor of public policy at the University of California at Berkeley, former US secretary of labour and author of the coming Super capitalism)
............................................
— FT Syndication Service