Tom Power - November 19, 2012
Debt, Deficits, and Fiscal Cliffs: Dangerous Con-Games in Wa
Debt, Deficits, and Fiscal Cliffs: Dangerous Con-Games in Washington, DC
Congress is back to “playing chicken” with the American economy. Many months back, with bi-partisan approval, a “fiscal cliff” was created to force Congress and the White House to take dramatic steps to cut the federal deficit rather than “kick the can down the road” again and again. Now, if a majority cannot be put together around some sort of budgetary plan, on January 1st all citizens will face relatively sharp tax increases and there will be across the board cuts in all federal discretionary spending programs.
That’s the “fiscal cliff.” The bipartisan concern with these increases in taxes and cuts in federal spending tell us something almost none of the participants are willing to say explicitly: Namely that if these tax increases and spending cuts take place, the federal deficit will be too small for the health of the American economy.
Both Democrats and Republicans seem to agree that these dramatic steps to reduce the federal deficit are not something the economy could tolerate right now: The increased taxes and reduced federal government spending would reduce overall demand so much that the economy would be pitched back into recession.
No one will say it in quite that way, but there is no other reason that these deficit reduction steps would be called a dangerous “cliff” unless exactly that were true. That suggests, correctly, that during periods of serious recession, the federal government ought to be running a deficit to support a minimum level of spending so that more of our economy’s productive capacity can be kept at work.
None of the participants in this particular game of fiscal chicken will put it this way because they are afraid they will sound irresponsibly “soft” on the federal deficit and accumulated debt. And the conventional wisdom expressed by both Obama and Romney during the campaign was that that federal deficit and debt is the most serious economic problem our nation faces. That is why the fiscal cliff was artificially constructed in the first place: to force Congress to act against the supposed threat posed by the high federal deficit and accumulating debt.
What folks are belatedly realizing is that the greatest threat to our economic well-being is not deficit and debt but a lagging economy that is hurting almost all of our families, forcing more and more children into poverty, and preventing our young people, newly entering the labor force, from finding jobs. That is the real threat and immediate harm.
The false panic over the federal deficit and debt that has distracted us from our real economic problems is tied to the fear that our nation, by over-spending, has run out of money and resources and is teetering on the brink of bankruptcy. Since we all have to balance household and/or business budgets, that story line seems plausible. But the problem is actually the opposite: Our nation has far more resources than it is currently using. We are not living beyond our means; we are living way below our means in the sense that we are not making use of the resources we already have: our labor force is un- or under-employed. Many of our factories and other businesses sit idle. That is what a recession is: the under-employment of the productive resources we have readily available. That is also why the federal deficit is so large: those under-employed resources are no longer paying taxes.
Unlike a household or business, the US federal government cannot run out of money or default on its debt unless, for perverse political reasons, it chooses to. The US government has a resource no business or household has: It is the source of the money that lubricates our economy and facilitates economic exchange. The US bonds that businesses, households, and foreign governments hold only promise to return to the holder a certain number of dollars which the US government can always create.
But, many will say, Greece is proof that a national government can in fact default on its debt. But Greece does not create its own currency. It is like a state government within the United States. Greece is a member of the Eurozone and uses the Euro as its currency, a currency Greece does not create or control. The US, on the other hand, controls its own currency and is also in the privileged position of having its currency used around the world for both storing wealth and facilitating exchange.
The often repeated half-fear, half-joke that the Chinese are funding our deficit and control our economic future because they hold so much of our debt is a gross distortion of what is actually going on. As most Americans are aware, we buy more from China than we sell to them. As a result, the Chinese have been accumulating US dollars. Rather than get no interest by holding those dollars as cash, the Chinese, like any prudent saver, has put those dollars in safe, interest-bearing bonds, namely US Treasury bonds. It is not just the Chinese who have chosen the US dollar as the safest way to store their accumulated wealth. Many other nations, businesses, and individuals around the world do the same thing. That reflects not the weakness of the US economy but its strength in a time of economic uncertainty.
The only thing the Chinese can do with their US Treasury bonds is to sell them and get plain ordinary dollars in return. The only thing the Chinese can do with those dollars is go shopping for the goods and services we have for sale in the United States. But that is exactly what we would like them to do: Buy the goods we can produce and put our workers back to work.
The federal deficit and debt are
not the cause of our economic problems but the result of the dramatic economic collapse we went through and out of which we are only now working our way. We have to keep our eyes on the real economic problems we face: Putting our productive resources back to work, including our fellow citizens, and moving household incomes back to where they were. Then, once we are back to full employment, we can focus on making sure our monetary system is managed in a way that both maintains that full employment and provides reasonably stable domestic price levels and an appropriate value for our currency in international exchanges.
As the recognition of the dangers of the “fiscal cliff” makes clear, trying to dramatically cut the deficit now, in the midst of a fragile economic recovery, puts the economic cart before the horse.