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Friday, October 11, 2013

Reminder: balancing the budget doesn't help the economy

by David Atkins

As we begin to engage in another round of deficit hysteria, it's helpful to remember that the notion that balancing the budget will help the economy is possibly the most widespread and most harmful lie in politics at the moment.

It's not hard to prove, either. No one disputes that a lack of jobs is due to a lack of business investment in creating jobs. The question is why businesses aren't creating those jobs.

The first and simplest conservative lie is that taxes and regulations are killing investment. Yet we know that effective business taxes are lower now than they were decades ago when many more jobs were being created, and we also know that corporate profits and stock prices are at record highs. That argument is easy to dismiss out of hand as partisan hackery.

The more sophisticated plutocratic lie is that uncertainty about America's fiscal future is causing a lack of investment. The argument goes that businesses won't invest in America because it's not clear that America will be able to pay its bills without hyperfinflation to cover unsustainable debts.

But this is also an easily disproven lie. Let's ignore for a moment the fact that the deficit is actually shrinking. It turns out that there is a market that directly prices the risk of the United States defaulting on our obligations: the U.S. treasuries market. The signal that global investors are leery of U.S. debt would be rising prices on treasuries, and/or investors fleeing the treasuries market. But the opposite has been happening. Not only are investors not fleeing U.S. treasuries, the market has been so strong that many have speculated there's a bubble in U.S. treasuries. Only with the Republican-led threat of default has the treasuries market started to destabilize.

It's important to restate this. There is an easy way to know if lack of confidence in U.S. debt obligations is causing lack of business investment. As long as the U.S. treasuries market is strong, saying that U.S. debt is the problem with business investment is a bald-faced lie. It's just objectively not true.

It's theoretically possible for debt to take on problematic levels at some point in the medium to far future. But the easiest and best way to reduce debt is by growing the economy. And if we know that low consumer demand is the reason for weak economic performance, it's insane to hurt consumer demand now by reducing government spending ni order to "solve" a possible long-term problem later. It makes no sense at all.

Whenever you see someone claiming that "reducing entitlements" now is the key to economic recovery, it's important to know that that person is either economically ignorant or deliberately conning you. More likely the latter.

They know that income inequality and corporate profits are at all time highs, and that maintaining current Medicare and Social Security obligations 20 years from now will likely mean higher taxes on them in the future. That's undoubtedly true, and entirely appropriate given rampant inequality. They also know that a much more progressive Millennial generation of voters won't hesitate to raise those taxes in 20 years.

So these people are lying to you, pretending that cutting "entitlements" will improve the economy today. They know it won't. They know it will do the opposite.

They're just lying. And nearly every major reporter in Washington is aiding and abetting that lie.