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Wednesday, Feb 6, 2013 5:46 PM UTC

Deficit reduction can’t reignite the economy

Defecit hawks and government-haters won't admit it, but we need to focus on bringing back better paying jobs

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Topics: budget deficit, Fiscal cliff, Bill Clinton, Bush Tax Cuts, Barack Obama, Congressional Budget Office,

Deficit reduction can't reignite the economyEric Cantor (Credit: AP)
This originally appeared on Robert Reich's blog.

Can we just keep things in perspective? On Tuesday, the president asked Republicans to join him in finding more spending cuts and revenues before the next fiscal cliff whacks the economy at the end of the month.

Yet that same day, the Congressional Budget Office projected that the federal budget deficit will drop to 5.3 percent of the nation’s total output by the end of this year.

This is roughly half what the deficit was relative to the size of the economy in 2009. It’s about the same share of the economy as it was when Bill Clinton became president in 1992. The deficit wasn’t a problem then, and it’s not an immediate problem now.

Yes, the deficit becomes larger later in the decade. But that’s mainly due to the last-ditch fiscal cliff deal in December.

By extending the Bush tax cuts for all but the top 2 percent of Americans and repealing the alternative minimum tax, that deal increased budget deficits by about $3 trillion above what the budget office projected last August.

The real deficit problem comes after that — when rising healthcare costs combined with 76 million decaying boomers will cost us all a fortune.

The answer is to move from fee-for-service healthcare to pay-for-healthy-outcomes, including lots of preventive care. This will almost certainly require a single payer instead of our balkanized healthcare system drowning in paperwork as each part of it bills and tries to collect from every other part.

Right now the central challenge is to reignite the economy — getting jobs back, improving wages and restoring growth.

Deficit reduction moves us in the opposite direction. That’s because most consumers (whose spending is 70 percent of economic activity) are still losing ground, and businesses won’t expand and hire without more consumers.

So government has to be the spender of last resort.

Under these circumstances, increasing taxes on the middle class (as, for example, Republican legislators and governors are eagerly doing by raising sales taxes, and as the federal government did last month by raising Social Security taxes) makes it even harder for consumers to spend. Which means slower growth and fewer jobs.

Likewise, cuts in government spending, such as occurred in the fourth quarter of 2012, cause the economy to contract — as it did in the fourth quarter.

In other words, we’re still having the wrong discussion. It shouldn’t be how to cut the budget deficit. It should be how to bring back good jobs and economic growth.

Deficit hawks and government-haters are still framing the debate. That bodes ill for all of us.

Robert Reich, one of the nation’s leading experts on work and the economy, is Chancellor’s Professor of Public Policy at the Goldman School of Public Policy at the University of California at Berkeley. He has served in three national administrations, most recently as secretary of labor under President Bill Clinton. Time Magazine has named him one of the ten most effective cabinet secretaries of the last century. He has written 13 books, including his latest best-seller, “Aftershock: The Next Economy and America’s Future;” “The Work of Nations,” which has been translated into 22 languages; and his newest, an e-book, “Beyond Outrage.” His syndicated columns, television appearances, and public radio commentaries reach millions of people each week. He is also a founding editor of the American Prospect magazine, and Chairman of the citizen’s group Common Cause. His widely-read blog can be found at www.robertreich.org. More Robert Reich.

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