Why Deficit Reduction Is Hurting The Recovery

By Dale Bowling



On Tuesday, the non-partisan Congressional Budget Office (CBO) came out with its economic
projections for the next ten years. The Media instantly trumpeted the fact that the Budget Deficit is projected to be below $1 Trillion this year for the first time in five years.  Progress, right?

Sadly, the Media missed the other part of the story.

Buried in the report was a curious set of findings. The CBO report found that in 2013 the economy will grow by a mere 1.4%. What hinders the recovery? Deficit reduction.

That's right. Deficits were supposed to slow economic growth, but reducing them has slowed
economic growth.

While this seems counter intuitive, it is totally in keeping with both economic theory and historical
experience.

The economist John Maynard Keynes said a long time ago that the time for cutting government
spending was when strong economic growth could absorb the losses that come with it, not when the
economy is weak and desperately needs the demand that government spending creates.

And if we compare this recovery to others in our life time, the difference is striking. During the Reagan recovery of the eighties, government spending was very high. It's well-known that Reagan tripled the federal Deficit, but spending was also very strong at state and local levels. This spending meant jobs. And people with jobs bought things from other people. So government spending created synergy with growth in the private sector and built a robust recovery. Eventually this deficit had to be paid for so President Bill Clinton raised taxes and cut spending during the boom in the mid-nineties and left us with a projected budget surplus. All good.

The Obama recovery could not be more different. Driven heavily by "suddenly concerned about the
Deficit" Republicans, government spending is at the lowest it's been in 60 years. At his current rate of
spending, Obama would have to be president for 20 years to spend as much as Reagan did during his
eight years in office. State and local government have cut jobs. Private sector businesses that sell
goods and services to government suffer as a result as well. Fewer people with jobs means fewer
people buying things which means fewer businesses hiring.

If the government had grown under Obama at the same rate it did under George W. Bush rather than face repeated cuts, we'd have a million more employed people than we do now and the unemployment would be a full percentage point less.

Thus Deficit Reduction acts as an anchor keeping the Recovery from really taking off.

And this is why sequestration is such a raw deal for America. Sequestration is the set of automatic
spending cuts which begin next month. That agreement came in the summer of 2011 when
Republicans were going to shut down the government if they didn't get a huge reduction in the size of
Big Government. Critics at the time said that huge cuts in government spending would hurt the
economic recovery and now CBO has done the math to prove it.

Sequestration must be postponed indefinitely until economic growth can absorb the losses that result
from it.