There is nothing inherently wrong with budget deficits. From the 1930s to the 1990s, the federal government embraced deficit spending and much good came of it. It all depends upon the size of the deficit, what programs and projects it pays for, and who finances the debt.
There is currently a lot of political hypocrisy involving deficit spending. Many of the same Republicans who embrace the Bush administration’s record-breaking deficits assailed the Democrats when they were running far more modest shortfalls.
Deficit spending, as espoused by the British economist John Maynard Keynes and adopted as monetary policy by Franklin Delano Roosevelt’s New Deal, helped prime the pump of economic activity that lifted us out of the 1930s depression. Along with higher taxes, it helped finance the Second World War and the prosperity that followed. All Presidents, Republicans and Democrats, up until Ronald Reagan accepted the wisdom of Keynesian economics.
During the 1930s and again in the postwar era, deficit spending financed the infrastructure that created our economic prowess: ports, airports, highways and navigable riverways, as well as hiking trails and campgrounds in our national parks and forests. Deficit spending also helped fund conservation measures to protect our soil, forests and cropland, and it built flood control dams and hydroelectric dams for clean low-cost energy. Deficit spending financed basic medical and scientific research as well, and also urban renewal projects and the construction of affordable housing.
Some of these projects are worthy of criticism. Inflated Cold War military spending, poorly conceived high rise public housing, urban renewal projects that destroyed livable neighborhoods, and farm subsidies that went to corporate farmers who harvested government money more avidly than actual agricultural crops are some examples of wasted government spending. But in these and other cases, it’s not the deficits -- it’s the projects -- that bear the criticism. Government spending is often inefficient. But corporate or private-sector investments haven’t proven themselves much better. As we’ve seen in recent years, the private sector can be as corrupt as the most notorious examples of government kickbacks, bribery and graft.
We know from the historical record that public investment is necessary where the private sector cannot make a profit and thus will not go. This includes affordable housing, rural electrification, and medical research that affect few people. The private sector invests money when it believes it can make a profit. The government has to -- or should have to -- provide housing, utilities, medical care, as well as equality and opportunity for all Americans regardless of the profit motive. And capital infrastructure projects are too expensive to be financed out of operational budgets.
The federal government can finance the deficit by printing more money, but this leads to inflation. Or it can borrow money by issuing Treasury Bonds, which the Bush administration is doing at an irresponsible level.
Why specifically are the Bush deficits different than past deficits? Why are they such a danger to the future of our economy?
Domestic creditors financed most of our past deficits. This gave the creditor-class economic power, but the interest accrued from the Treasury Bonds was at least spent at home and, with the multiplier effect, helped the entire economy.
Foreign creditors, by contrast, own most of the Bush deficits. Japan and China are our two greatest creditors. According to the Bloomberg Report of 11/26, China holds $180 billion of U.S. Treasury notes. And, according to the Treasury Department, Japan holds $720.4 billion. The interests on these bonds strengthen China and Japan. Even where American creditors own Treasury Bonds, globalization encourages them to invest in manufacturing jobs in countries like China where profits are high because wages are low.
Peter G Peterson, Republican chair of the Council on Foreign Relations, has written, “The United States is now borrowing about $540 billion per year from the rest of the world to pay for the overall deficit funding…. The United States imports roughly $4 billion of foreign capital each day, half of that to cover the current-account deficit and the other half to finance investments abroad.” Our foreign debt, about 4% of the Gross Domestic Product (GDP) in 1992, rose to 24% at the end of 2003. That represents an estimated $5,500 per household this year.
President Clinton, recall, balanced the budget and began to reduce the national debt. Under Bush, according to the Congressional Budget Office, 32 percent of non-Social Security spending will be financed with borrowed money this year. What a reversal!
The Bush deficit has to be understood as a wealth redistribution scam, based on unfair tax policy, not on investments for capital improvements in the domestic sphere. It’s a deficit based on values of selfishness and greed. We want to be the strongest country in the world, yet too many of us don’t want to pay for the costs of the effort. Instead, we propose to foist the debt on to our children. They will pay the bill for our financial irresponsibility.
Based on the tax cuts of 2003, according to the Citizens for Tax Justice, taxes on the wealthiest one percent will fall by 17 percent by the end of this decade. For the remaining 99 percent of taxpayers, the average tax reduction will be 5 percent. A family that pays taxes on earnings of %500,000 will save $85,600, enough to buy a gas-guzzling Hummer, finance a first-class holiday anywhere in the world, and still have thousands left for campaign contributions to “persuade” members of Congress to keep taxes low. An average family with an income of $30,000 would save $1500 over the decade, enough to take a small chunk out of their credit card debt and spend a day at the mall. Like our country, our daily expenses are sustained by borrowing and we’ve nothing set aside for a rainy day.
To check where the national debt stands today and how much of it you owe, go to www.brillig.com/debt_clock/.
Other Articles by Marty Jezer