It seems like every time I get into a discussion with someone about the state of the economy, the conversation always quickly morphs into a discussion over the federal budget deficit as if the two problems are so closely related they might as well be combined into one problem. I’ve noticed this trend over and over, online (even in this forum) and in real life. I’ve seen “solutions” to fix the economy that involve cutting gov’t spending as if this would ever, by itself, help the economy. What causes this type of thinking? Why does it feel natural to link the two?
Trying desperately to keep this in GQ territory: If there was a shortage of investment capital, and if the economic benefit of private investment of this capital was greater than the economic benefit of incremental government spending, then cutting government spending would improve the economy. If, for instance, you were convinced that governments never create jobs, then almost by definition private spending would be better.
Cutting Government spendingmight help the economy in the long run, but that isn’t the question - it’s whether deficit spending is helping to hurting the economy. I suspect that borrowing money from future generations is only helping today’s economy. This may not be sustainable in the long term, but today’s deficits are not hurting the economy, and are not even a serious long term problem, if the cost of money stays low.
What causes this thinking? I think it’s people who think the government is just a big household. If your household is “in a recession” (i.e. has had income reduced) then the solution for the household is to cut its expenses so that you continue to live within your means. Since this is so ingrained in us as the correct response to reduced income, we reflexively apply it to the government.
You even hear this explicitly stated in many peoples’ arguments - things like “When I lost my job, I stopped buying new clothes and shoes. But when recession started, the government went out and blew an extra $800 billion in a big shopping spree.” I don’t think most of these people even realize the leap in logic; to them it’s just “common sense.”
I guess as a follow on, can anyone support this assertion: “The enormous federal budget deficit is hurting our economy.”
I guess the only way I could support it is to say that maybe the large deficit brings pessimistic feelings about whether or not it’s even possible for the economy to recover, simply because no one has the stomach for more deficit spending, especially the sustained and targeted spending it would take for the middle class to recover. Having a large deficit really limits the options we have to deal with the problem.
Paying that debt consumes a large portion of the budget.
Running deficits adds to the public debt.
If we didn’t run deficits, we could pay the debt.
If we paid the debt, we’d either have more money to spend on government programs, or (even better!) need less government spending, which would result in lower taxes.
Therefore, the solution is to cancel programs (cut spending), lower spending, cut taxes and put more money in our pockets.
One can also argue that the deficit we had when we went into the recession, created during a time of relative prosperity, hurt the economy because it limited the ability to run a deficit for a stimulus. However I suspect many people kvetching about the deficit now won’t want to hear that message.
The big factor is that the debt means we’re making payments. America is sending billions of dollars to China every year. It’s easy to see how that causes problems for the American economy.