The Attack of the Killer Deficit?

According to politicians and pundits across the spectrum, the biggest economic threat to the country is not the suffering of millions of unemployed people but the specter of ballooning federal debt. (Deficits are the shortfalls in any given year, debt is the grand total.) Why this sudden obsession with government debt?

Renewed concern in Washington over the federal debt is a sort of victory lap for the bankers.

Two years ago the government saved Wall Street from certain collapse with $2 trillion in bailouts—all of which added to the government’s tab. Now Wall Street is saying the deficit is dangerous and needs to be paid down—by us.

They say a big deficit makes investors (themselves) nervous. Might the government default on its bonds? They need a show of good faith if they are going to keep lending to Uncle Sam.

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But the real reason the bankers are mounting a huge scare campaign is that they see a bipartisan opportunity.

The plan is to convince enough politicians, who are usually eager to listen to Wall Street, that the way to cut the deficit is to chop the programs that don’t benefit big business. Those turn out to be ones that working people need. They are also keen to avoid discussing the other half of the equation—the revenue side—since raising taxes on the wealthy (themselves) would be another way to balance the budget.

Why tax the rich or cut military spending when you can strong-arm elected officials into laying off public employees, or cutting bus service or health care for the elderly?

IS IT A PROBLEM?

How big a problem is the deficit, in reality? You hear Tea Partiers say, “I have to balance my checkbook every month, why shouldn’t the government?” The analogy is dead wrong, unless you’ve never used a credit card, taken out a student or car loan, or had a mortgage. Like the government, almost everyone uses debt—and lots more of it relatively speaking—to buy now and pay later.

But with most of the country maxed out, how do we make sure the federal government doesn’t follow suit?

It’s true that government debt as a percentage of economic activity (GDP) has risen sharply since the recession began in 2007. But that is largely because of two wars, falling revenue thanks to the Bush tax cuts, and the economic collapse itself, which meant less tax revenue coming in. The deficit was further increased by the bailouts and the stimulus, Washington’s extraordinary measure to ward off another Great Depression.

Will red ink choke the life out of our economy? It depends. All government spending is not equal. Issuing bonds in order to kill people in Afghanistan doesn’t add to the national productivity. Neither did the bank bailout, as it turns out, since the bankers have been sitting on a mountain of cash and not lending much.

But if the government spends on infrastructure or education or health care, those things increase the country’s economic potential and our productivity. Debt created by smart spending like this actually becomes easier to pay back later, as productivity grows.

It’s as if someone went into debt to pay for medical school. Yes, she’d be in debt, but not because she’s a slacker. She’ll make the loans back and more once she starts practicing medicine. But if she maxes out credit cards to play the slots, she has nothing to show for her debt but debt.

If the bankers want to argue over how the federal government spends its money, game on. The U.S. deficit is swelling with far too much spending that doesn’t make ordinary people healthy, well-educated, and well taken care of. If we go down that road, everything has to be on the table, including making sure that those who’ve made out like bandits for the last 30 years pay their fair share.