Don't Kill Growth And Jobs In The Name Of Deficit Reduction

In the fall of 2008 the U.S. and other major economies were in a free fall in the wake of a global financial crisis. Emergency stimulus policies here and around the world broke the fall, but brought us only part way to full recovery.

Today there is a grave danger that the still-fragile economic recovery will be undercut by austerity economics. A turn by major governments away from the promotion of growth and jobs and to premature focus on deficit reduction could slow growth and increase unemployment – and could push us back into recession.

History suggests that a tenuous recovery is no time to practice austerity. In the Great Depression, Franklin Roosevelt’s New Deal generated growth and reduced the unemployment rate from 25 percent in 1932 to less than 10 percent in 1937. However, the deficit hawks of that era persuaded President Roosevelt to reverse course prematurely and move toward budget balance. The result was a severe recession that caused the economy to contract sharply and sent the unemployment rate soaring. Only the much larger wartime spending of the early 1940s produced a full recovery.

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Austerity advocates confuse two different issues—short term deficits generated by the recession and long term projections of deficits and debt. Deficits rose last decade largely due to the Bush tax cuts and the unfunded wars and prescription drug program, but they exploded as a result of the economic crisis. Once prosperity is restored, deficits will be reduced substantially. Over the long term, projections of rising deficits and debt are mainly due to one fundamental factor: rising health care costs.

Contrary to the claims of many deficit hawks, America does not have an entitlement crisis. America has a broken health care system. Efforts to reduce public sector costs without fixing the health care system, such as caps on Medicare and Medicaid spending or replacing them with vouchers, will undermine the effectiveness of these programs, but won’t fix the broken health care system. The health care reform bill passed earlier this year may be a first step towards repairing the health care system, but much more will need to be done.

Social Security has nothing to do with our current deficit. It is supported by its own dedicated payroll taxes (which were increased to build up a trust fund to cover the baby boomers’ retirement). Social Security has actually reduced the unified budget deficit for the most of the last three decades and will continue to do so for most of the next decade. Making sure Social Security is solvent for the next century should be dealt with separately from any process set up to address short or long-term deficits, and can be accomplished with minor adjustments.