Fiscal Conservatism And Necessity

We're in a depression. To many, that's stating the obvious. But it seems not quite everyone realizes just yet.

GDP depressed below normal levels from 2008 through this writing

Our commerce has been significantly below capacity for several years. By the end of 2008 the quarterly output gap exceeded even the previous record (from 1982) for output gaps since 1949. We've seen the main characteristic factors of depression beyond just the raw output gap: increased unemployment, tight credit for consumers and small business, and bank failures (though many of the potential failures were averted). And as anyone familiar with Irving Fisher's work should know, we'd surely have had significant deflation from the paying down of private debts were it not for a series of Fed actions to mitigate deflationary forces.

Deficit hawks ignore the reasons for our deficits in recent years. Depressions increase short-term costs. People out of work utilize the safety net when they wouldn't otherwise. We have a severe short-term increase in costs. At the same time, depressions also reduce revenue. We bring in less tax money because fewer people are getting paid, and often smaller real wages.

There's one clear answer to get rid of deficits: get people back to work. Rev up the economy back to potential. Close the output gap. Until we do that, we'll continue to have increased costs and reduced revenues.

In our attempts to close that output gap, today's fiscal conservatives hamstring us with massive state budget cuts to avoid the temporary tax increases and/or bond issuance needed for dealing with the downturn. Their unwillingness to raise revenue means lots of layoffs, slowing down our economy while hurting the quality of services that we the people want. Many of us would willingly pay more in taxes to keep quality of service through an economic downturn. Many of us would be more than willing to pay more in taxes to keep investing in the sort of growth-spurring government measures that can get us back to expansion. But fiscal conservatives will brook no such sensibility. So instead we get slower growth and less prosperity. Like our slow recovery? Thank a fiscal conservative. Like our rising tuition costs for students? Thank a fiscal conservative. Like our broken roads increasing business costs? Thank a fiscal conservative. Like fewer research patents being licensed to domestic businesses than we'd otherwise have over the coming years? Thank a conservative.

This impact is nothing new. We had deficit hawks and credit growth hawks to thank for the recession of 1937-38 when attempts to balance the budget and tighten monetary policy put a crimp in recovery from the Great Depression. We had sharp cuts in the name of balanced budget zeal to thank for the recessions and increased unemployment under Eisenhower. Time and again, we keep having to re-learn the lesson that sharp cuts hurt even when they're earnestly meant to help.

We're long overdue to stop letting fiscal conservatives shape the narrative. We need to stop worrying about balancing the budget when we're in the midst of a downturn. When the economy's roaring at full steam, then we can afford to mess about with budget balancing. Until then, we can't afford their cuts.

One needs to already be in good shape to recover from a deep, large, sharp cut. Until we've eliminated the output gap, we need more recovery efforts ... not more cuts.

How The Govt Differs From A Household

Another good quip from Krugman in "Losing the Belt",

"When a family tightens its belt it doesn’t put itself out of a job. When a government tightens its belt in a depressed economy, it puts lots of people out of jobs; and this is a negative even from the government’s own, narrowly fiscal point of view, since a shrinking economy means less revenue.

Now, you might argue that slashing government spending doesn’t actually cost jobs — that is, you might argue that if you spent the past few years in a cave or a conservative think tank, cut off from any information about how austerity is working in practice."

That really is a core difference. When a family tightens its belt, it doesn't lower its household income by making one or more family members quit their jobs. When the govt tightens its belt, it pushes people out of work, lowering its own income.

Plan For Growth

"It takes as much energy to wish as it does to plan." - Eleanor Roosevelt

We have uncomfortably high unemployment. We want that to come down. We also have an uncomfortably high deficit. That needs to drop too. What we need is a plan. One that can do both. One that can work.

Our new House majority has loudly pushed focusing on the deficit with budget cuts. The trouble, as I've previously shown and discussed in relation to specific budget cutting figures, is that any significant budget cuts are very, very likely to steer us into far higher unemployment. That would further reduce tax revenues and make the deficits worse. So that just won't work. We can't get rid of the deficit by chopping growth and making the deficit worse.

What can we do?

Well, what happens if we maintain the status quo? What happens if we proceed with spending at the exact dollar amount it is now, keep tax rates exactly where they are, and manage to keep the pace of growth at the roughly 3% estimated for 2011? (Note that spending is scheduled to shrink in 2012 with the expiration of stimulus programs and the winding down of expensive wars. So this assumes we actually spend more than is currently expected for some of these years.)

Deficit/surplus assuming budget holds steady, 3% GDP growth, and revenue stays at the current 14.81% of GDP

Interesting. We'd have a surplus by 2029 at that rate and could start reducing our debt. That's without budget cuts. That's even assuming more spending for at least one of those years than is currently projected. We'd all love to see that budget gap closed sooner, but that's going in the right direction.

OK, how can we speed that up? What happens if we go back to the 30-year average of revenue as a percentage of GDP starting in 2012 but keep all else as before, with spending staying at the 2010 dollar level and a 3% GDP growth rate?

Deficit/surplus assuming budget holds steady, 3% GDP growth, and revenue goes back to 18.2% of GDP in 2012

A bit better. That'd have the surplus and its potential paying down of the debt begin in 2022. But let's try for more. What happens if we go back to the 30-year average of revenue as a percentage of GDP starting in 2012, keep spending at the 2010 dollar level, and find some way to increase our growth rate over 3%? For the sake of charting, let's imagine we get it up to 4% in 2012, peak at 5% in 2013, and then manage 4% thereafter.

Deficit/surplus assuming budget holds steady, but revenue goes back to 18.2% of GDP and avg. 4% GDP growth from 2012

That's more like it, don't you think? If we could achieve an average 4% GDP growth over that time, we could be seeing revenue eclipse spending in 2019, assuming we keep spending at the dollar amount from 2010 and return revenue back to the 30-year average of 18.2%. That's just 8 years from now. I don't know about your kids, but that's even before my older daughter will start college.

That's fairly vague, I'll admit. I've left a lot of room for what exactly those efforts to increase the rate of GDP growth might be. Where to get the money? I'm not a defense expert, but even some conservatives are suggesting we have some fat to trim in the defense spending. Imagine if we took those proposed cuts on spending beyond what the Pentagon actually needs to do its job and transferred that money into real job creation programs.

Off the top of my head, I can come up with several ways we could be doing more to create jobs through our Federal govt:

1. a reborn national Civilian Conservation Corp chartered for 5 with potential to renew
2. repairs to all of our crumbling bridges (and maybe revamping some roads too)
3. high tech research towards "green" energy and products

The first two of these would easily pay off right away. We've got a lot of unemployed construction workers, and it shouldn't take a terrible lot of retraining to put a lot of them to work in a CCC or on improving our transportation infrastructure. The research part might take a bit longer to get going, but the pay-out would go even further. Well beyond when we might have brought our unemployment down using a CCC and beefed up infrastructure projects, we could be benefiting from jobs and sales in exporting of green tech, just like we've benefited from Defense Department and NASA research in our computer industry. That's investing prudently in a future for our children.

It's time.