Central to the Republican critique of the Obama Administration in this election cycle has been the Administration’s supposed failure to address and resolve the problem of America’s growing debt. There is much wild and loose talk in beltway circles these days about federal over-spending, about federal over-borrowing, about the nation steadily going broke, and about the national security threat creatd by the size and character of the federal deficit.[i] There is much Washington talk too about the resulting need for tough decisions, shared sacrifices, the pruning of government programs and the ending of entitlements. Indeed the Republican Party has got the deficit-reduction bug so badly right now that they are currently committed to the addition of a balanced budget amendment to the constitution, an amendment explicitly designed to constrain federal spending in exactly the same way as similar amendments to state constitutions now constrain most state governments. And Mitt Romney has the bug so badly that he is committed to policies designed to cap federal spending at 20% of GDP, even though demographic pressures alone will be sufficient to challenge that cap – so that the cap will be maintained only by a fundamental erosion of basic welfare services to all but the wealthiest Americans.

This is Mitt Romney, writing in his Believe in America: Mitt Romney’s Plan for Jobs and Economic Growth.

Over the first three years of President Obama’s tenure in the White House, federal spending grew from $2.98 trillion to $3.82 trillion, an enormous 28% increase. Future spending is also expected to continue expanding unchecked. This sharp rise has been entirely a matter of choice….To return the United States to the path of fiscal discipline, America must cut its government spending, cap that spending at a sustainable level, and pass a Balanced Budget Amendment to the Constitution. Cut, Cap and Balance are three words that are spoken far too rarely in Washington…In a Romney administration, they will be heard loudly and acted upon in a consistent manner.[ii]

Indeed there is a spectrum of deficit proposals now on the table in Washington. It is a spectrum that begins with the draconian budget reductions of the libertarians (Ron Paul, you will remember, promised to cut a massive $7.2 trillion off the federal budget over ten years). It passes through the Ryan budget’s still tough but more modest $5 trillion reduction, and the proposals of bi-partisan commissions such as Bowles-Simpson ( their spending cap was 22% of GDP, a kind of soft Romney); to run right through to the President’s own proposals. For even the White House is not challenging the fundamental claim here: that the United States has a federal debt problem which is so severe that its resolution must take precedence over other domestic policy goals. The White House is simply claiming that Democrats can cut federal spending more slowly, more carefully, and in a more civilized and humane fashion.  Romney may think the federal deficit is a choice. The President thinks it is a problem; but he too, like Romney, thinks he has a solution: “a total savings of more than $4 trillion over the next decade,” bringing “the country to a place, by the middle of this decade, where current spending is no longer adding to our debt, debt is falling as a share of the economy and deficits are at a sustainable – if not preferable – level.”[iii]

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So who is right? To find the answer, it is worth bearing in mind at least the following 10 things.

1.      When discussing debts and deficits, the first things we need are conceptual rigor and verbal precision.

Not all debts and deficits are the same, and we do ourselves no service by pretending that they are. Collapsing them together into one term – debt – obscures the relationship between them, ducks the possibility that policy addressed to the resolution of one kind of deficit may make other deficits worse, and denies the chance that some forms of deficit may even be desirable.[iv] There are/can be immediate budget deficits, trade deficits, long- term deficits on the national accounts, and deficits on people’s personal accounts. The government can be in debt. The nation can be in debt. You and I can be in debt. Particular categories of you and I can be in debt: students can be in debt, old people can be in debt, the poor invariably are in debt. And not all deficits are money deficits.  There are/can be employment deficits, investment deficits, and growth deficits.

You cut budget deficits by pruning programs and/or raising taxes. You cut the proportion of the GDP absorbed by the National Debt by borrowing less or by growing GDP more. You cut personal debt by strengthening wages and generating employment. Cutting budget deficits by pruning programs and raising taxes can make immediate job security worse and short-term GDP growth more difficult. Bear this in mind also. Not all government spending adds to federal debt. Some spending is merely a transfer payment between citizens. So let us not drop into thinking that the entirety of federal expenditures are legitimate targets for those who would cut programs as a way of reducing deficits. Social Security, long a target of the right, is a transfer program, passing money from taxpayers to the elderly. It is not a spending program. A dollar “spent” by Social Security does not add to GDP. It simply shifts the capacity to spend that dollar from one American to another. Regardless of its solvency as a system (and it is solvent) Social Security has no place in any discussion of deficit reduction.[v]

2.      The second set of things we need are a clear understanding of the interconnections between deficits, and a clear sense of which deficits are causally primary and which are not.

We need to be careful how we prioritize deficit reductions, to make sure that as we focus in on one deficit, we don’t inadvertently accentuate the difficulties associated with other deficits. We need to be careful too about how we measure our success in reducing the deficits on which we focus: measuring the success of public policy not just against book-keeping numbers but against the real things that matter – not least against the job security and material well-being of ordinary American families. We need, that is, to make sure that we are not waging class warfare under the guise of simple accountancy. Most of all, we need to realize that if the debt problem we currently face is the product of some deeper crisis – as in our present conditions it most definitely is, a federal deficit problem caused by a prior global financial crisis – then it is highly unlikely that a solution addressed solely and simply to the second-order issue (the issue of the federal deficit) will solve even the issue on which we choose to focus. The accurate framing of our main problem therefore becomes a vital early task. As the British political scientist Colin Hay wrote in criticism of the Republican Party’s equivalents in the UK (the program-slashing coalition government led by the Conservatives), “were the crisis constituted differently, as a (first-order) crisis of growth not a (second-order) crisis of debt, then austerity and deficit reduction would be no solution at all.”[vi] Or as the American liberal economist James Galbraith told the Bowles-Simpson Commission, “The only way to grow out of our deficit is to cure the financial crisis.”[vii]

3.      We are currently suffering from many kinds of debt, of which the current federal deficit is arguably the least important.[viii]

The budget deficit and the scale of overall public debt in contemporary America is disturbingly high, but so too is the level of our international debt, and the scale of personal debt here at home. Total federal debt at the end of fiscal 2010 was $14.1 trillion, of which $9.4 trillion was held by U.S. and foreign investors, with the rest made up of borrowing from within the government itself, mainly from the Social Security Trust Fund. At about 62% of GDP, that borrowing constituted a higher debt-to-GDP ratio than in any year since 1955.[ix] Big numbers, of course, but there are other big numbers too. Total student loan debt in the United States now exceeds $1 trillion.[x]  Total credit card debt is just slightly less ($962 billion, or $14,750/household[xi]). The U.S. trade deficit is currently running at $42 billion a month. The trade deficit with China makes up at least two-thirds of that.[xii] The broader measure of America’s debt position with the rest of the world – the U.S. Net International Investment Position – was $4 trillion in the red in 2011, up from negative $2.5 trillion from the year before.[xiii] At 69.4% in 2011 and projected to rise to anywhere between 70% and 80% by 2020, the  public debt-to-GDP ratio in the United States is currently comparable to Germany’s (81% in 2011) and way lower than Japan’s (225%). It is also comparable to the debt-to-GDP ratio of the U.S. household sector in 2011 (88.2%).[xiv]

Yet at the same time, the proportion of GDP being taken in taxes by the federal government is at a 60 year low;[xv] the central government tax-take in the United States is lower than in all but three other OECD countries;[xvi] the drift of taxation under the Obama Administration has been downwards; [xvii]and the effective rate of US corporation tax is currently lower than it has been since the Clinton presidency.[xviii]  Meanwhile, unemployment caused by outsourcing is at a record high (2.7 million jobs lost between 2001 and 2011[xix]), while the long-term trajectory of discretionary spending by the federal government is both low and modest. (Health and pension spending is going to rise, but the rest of the non-military federal budget is actually falling as a percentage of GDP: down from 7.7% in the late 1970s to 5% now, and projected to hit a near 40-year low by 2017.[xx]) The real deficit we have is an output gap. We are at least 12 million jobs short to get back on track to the 2007 peak.[xxi] With that deficit before us, bipartisan commissions that focus exclusively on issues of federal fiscal responsibility serve only to distract. James Galbraith suggested to the Bowles-Simpson Commission that the best way they might serve the Republic was not to report at all. He had a point.

4.      The budget deficit with which we are currently struggling is one created by the very policies now being canvassed by the Republican Party.

It is worth remembering too that the United States enjoyed a budget surplus in the last three years of the Clinton Administration. The Clinton legacy to the Bush Administration was the very balanced budget by which contemporary Republicans set such store. It was policy initiated by the Bush Administration, and not by its Democratic predecessor, that turned that surplus into a deficit: primarily by introducing tax cuts in 2001 and 2003 that benefited predominantly the very richest Americans,[xxii] and by running two wars financed by borrowing. If running a federal deficit is a choice, as Governor Romney says that it is, we need to remember that the choice was initially made by George W. Bush, not by Bill Clinton, and that President Obama entered the White House with the CBO forecasting a budget deficit for 2009 of over $1 trillion.[xxiii] But even then, government spending as a percentage of GDP remained on a low and sustainable trajectory right through to 2007 (the budget deficit was still just 1.2% of GDP in 2007[xxiv]). It was the collapse of the US financial system – the collapse produced by inadequate/absent regulatory supervision in the Greenspan years – that called forward big federal spending programs designed to put a floor under the recession, and sent the budget deficit up into new and unprecedented territory.[xxv] That spending, however, was not unique to the United States. The governments of all major economies initially responded to the crisis in a similar way; and in truth the U.S. stimulus package was actually smaller than many introduced elsewhere.[xxvi]

So when contemplating a further round of tax cuts for all Americans – including for the richest amongst us – it is worth remembering that the federal deficit that is now so distressing to Congressional Republicans was a deficit built up on their presidential watch, and was built then by the very policies that they now are so keen to reintroduce. And it is striking in this regard that, in the face of a looming recession again in 2012, the Chinese, South Korean and now the Swedish governments are once more spending public money to stimulate their economies. Far from cutting spending by central governments, moments like these remain ones in which extra federal spending has an important role to play in aiding an economic recovery that would otherwise either stall entirely or grind on at an unacceptably slow pace.

5.      The debt crisis of which Republicans so regularly speak is one entirely manufactured by themselves.

Moreover, we should also remember that the sensitivity of financial markets and credit rating agencies to the size of the immediate federal deficit, and to the accumulating scale of the U.S. national debt, is almost exclusively a Tea Party creation. The mid-term election victory of ultra-conservative House Republicans released into American politics two phenomena that shook global confidence in the hitherto established role of the U.S. economy as the world’s consumer-of-last-resort. The first was an entrenched refusal to co-operate with any Democratic Party proposals that used public funds for job creation purposes, even when those proposals contained (as they invariably did) a larger degree of tax reduction and program pruning than Democrats in Congress and the White House would normally have countenanced. The second was a parallel propensity to play political brinkmanship, using a willingness to close down the government as a lever to gain even deeper tax and program cuts. We saw that in the tax reforms negotiated in December 2010. We saw it in the Republican threat to close the federal government entirely in April 2011. We saw it in the debt ceiling fiasco of last summer, and we saw it in the failure of the super-committee set up as part of the settlement of the debt-ceiling fight. We may yet see it again this December, as we approach the “fiscal cliff” left in place by the failure of the super-committee to come to a bipartisan agreement.

Historically, raising the federal debt ceiling had been a bipartisan process of no significance. It had been raised many times without rancor since its initial creation in 1917, and until 2011 received the votes not just of liberal Democrats but also of fiscally conservative Republicans. There were 91 debt-ceiling bills passed between 1940 and 2010, 73 of which increased the limit and 11 extended the limit’s duration: collectively taking the limit from $3,122.7 trillion to $14,294 trillion without major political controversy.[xxvii] It was only Tea Party-driven Congressional Republicans who, bound by their pledge to Grover Norquist never to increase taxes, then made raising that ceiling politically significant.[xxviii] It was they, and they alone, who chose to make the debt ceiling an issue; and because they did, the rest of us can always choose to make it a non-issue instead. [xxix] And we should, just as quickly as we can.

First posted at www.davidcoates.net