23 May 2012

How high is the cliff? Choosing between deficits and recession

Conventional wisdom, at least among Republicans, contends that government deficit spending is one of the major contributing factors in the country's economic slowdown, the logic being that every dollar spent by the public sector is one the private sector can't spend to create jobs. Reducing government deficits has been presumed to be a prerequisite for economic recovery. Now, however, the reputedly nonpartisan Congressional Budget Office warns that deficit-reduction measures scheduled to take effect next year could push the country back into recession, at least for a short time. While the rhetoric about a "fiscal cliff" makes the situation sound dire, the CBO apparently predicts only a few months of recession, with growth to resume slowly before the next year is out. Despite the resumption of growth, the CBO report projects a higher unemployment rate by the end of 2013 than at present if the deficit-reduction measures take effect. Perhaps predictably, the CBO recommends against letting the George W. Bush tax cuts expire as they're scheduled to do at the end of this year. Perhaps less predictably, it also warns against spending cuts.  If scheduled spending cuts are cancelled, the CBO anticipates a healthy rate of economic growth throughout the coming year.

All of this sounds surprisingly Keynesian, and perhaps also Reaganesque, Reagan having to some extent borrowed his way out of the recession he inherited from Jimmy Carter. While the CBO reportedly warns that the government can't continue to indebt itself indefinitely, it appears to concede that there are times when governments, at least, can't simply settle for living within their means. That's not something many actual Congressmen concede. But the CBO report seems to have something to offend people on either side of the proverbial aisle. Democrats want the lower tax rates to lapse, while Republicans certainly want to cut some kinds of government spending.  It shouldn't surprise us to see a purportedly nonpartisan entity tell both sides that they're partly wrong. Nor will it surprise us to see partisans and ideologues explain how the CBO is wrong on one count or another. If the CBO is right, however, we should ask what it tells us about our economy, at the present time and in general, if the private sector can't create an adequate number of jobs unless the government spends more than it takes in and more than it actually planned to spend. Some may fall back on an assumption that government spending itself isn't the real problem, but taxation still is. Others may look at the year-long projection and opt to tough it out on fiscal principle. In any event, I'm not sure if anyone's economic orthodoxies are vindicated by this story. Things aren't as simple as the dismal scientists say, or wish.


Anonymous said...

The real problem is capitalism. This entire mess is completely due to the private sector not being satisfied with it's level of profit. So rather than finding ways to increase it's market share, it cuts jobs. That is the plain, cold, hard truth.

If the people had the top had any decency at all, none of this would even be under discussion. Those at the top refuse to cut their inflated lifestyles, so everyone else is expected to. That is the true definition of "austerity".

Samuel Wilson said...

While I think it is possible in different circumstances to argue that a tax-fueled social-welfare state is unsustainable in the long run, too many Americans have proven their bias against the idea for their opinions on sustainability to be objective. It's worth adding that the Founders feared the corrupting influence of luxury and in some cases recommended frugality (rather than "austerity") for everyone regardless of income.