The Deficit Battle

A battle between two sides, neither of which truly represents the interests of working people – Published on Global, by Prof. Martin Hart-Landsberg, July 18, 2011.

… Deficit Reduction: Through Spending Cuts or Tax Increases:

Most of those who demand deficit reduction primarily through spending cuts have as their real goal a further weakening of the public sector and our social programs even though they claim that their only motivation is to do what is best for job creation. If we agree that drastic action must be taken to reduce the deficit (to be discussed more below), we face a basic choice: maintain taxes and cut government spending or maintain spending and raise taxes. Cutting public spending pulls money out of the economy, costing jobs. So does raising taxes. The question is whether we lose more jobs cutting spending or raising taxes.  

The fact is that almost all studies of the economic impact of changes in government spending and taxes on employment find that changes in government spending have a larger impact on jobs than do tax changes. That means cuts in government spending will cost more jobs than an equivalent increase in taxes. Therefore, if we really care about jobs, deficit reduction efforts should emphasize tax increases over spending reductions. Sadly, both sides in the deficit battle are on the same wrong side as far as this choice is concerned.

Social Programs vs Wars and Tax Cuts: … //

… Unfortunately, our national debt ceiling is defined in terms of gross federal debt rather than the more appropriate total debt held by the public. At the same time, this understanding of the debt problem leads to a relatively simple solution to our current deficit battle. As Dean Baker describes:

“Representative Ron Paul has hit upon a remarkably creative way to deal with the impasse over the debt ceiling: have the Federal Reserve Board destroy the $1.6-trillion in government bonds it now holds. While at first blush this idea may seem crazy, on more careful thought it is actually a very reasonable way to deal with the crisis. Furthermore, it provides a way to have lasting savings to the budget.

“The basic story is that the Fed has bought roughly $1.6-trillion in government bonds through its various quantitative easing programs over the last two and a half years. This money is part of the $14.3-trillion debt that is subject to the debt ceiling. However, the Fed is an agency of the government. Its assets are in fact assets of the government. Each year, the Fed refunds the interest earned on its assets in excess of the money needed to cover its operating expenses. Last year the Fed refunded almost $80-billion to the Treasury. In this sense, the bonds held by the Fed are literally money that the government owes to itself.

“Unlike the debt held by Social Security, the debt held by the Fed is not tied to any specific obligations. The bonds held by the Fed are assets of the Fed. It has no obligations that it must use these assets to meet. There is no one who loses their retirement income if the Fed doesn’t have its bonds. In fact, there is no direct loss of income to anyone associated with the Fed’s destruction of its bonds. This means that if Congress told the Fed to burn the bonds, it would in effect just be destroying a liability that the government had to itself, but it would still reduce the debt subject to the debt ceiling by $1.6-trillion. This would buy the country considerable breathing room before the debt ceiling had to be raised again. President Obama and the Republican congressional leadership could have close to two years to talk about potential spending cuts or tax increases. Maybe they could even talk a little about jobs.”

In sum, we are witnessing a deficit battle between two sides, neither of which truly represents the interests of working people. No wonder, then, that the battle has done little to clarify the drivers of our rising national debt or encourage a productive national debate over appropriate policy responses. (full text).

(Martin Hart-Landsberg is Professor of Economics and Director of the Political Economy Program at Lewis and Clark College, Portland, Oregon; and Adjunct Researcher at the Institute for Social Sciences, Gyeongsang National University, South Korea. He writes regularly at Reports from the Economic Front. Articles by Martin Hart-Landsberg).

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