Who benefits from deficit cutting?

Factual Questions
1

Economists (amateur and professional) seem to be sharply divided as to what sort of government action will be of most benefit to the sort of high-unemployment, sluggish economy in which we (in both North America and Europe) now find ourselves. Some think that high levels of government deficit spending is necessary to stimulate economic growth, and increase economic activity, and get people back into productive , wealth-creating work. They take the view that the time to pay off government debt is when the economy is restored to a more dynamic state, when taxation levels can safely be increased without undue negative effects on growth, when government revenues will have increased anyway due to increased activity, and when the additional government spending needed to combat recession will no longer be necessary (and when, indeed, it might anyway be wise to ‘cool down’ the economy a bit, by taking money out of it, in order to prevent another bubble and crash).

Others, however, (and those whose views seem to be dominating policy at the moment) think that government deficits are much, much too high already, and that if they are increased further, or even if serious action is not taken to decrease them now, then they will have a very negative effect on the economy in future. (Whether they think this should be done by raising taxes, cutting spending, or both, is not really to the current point.)

Please note, that I am not asking which side is right (that would certainly belong in GD rather than GQ), who has the more coherent economic theory, or how these views tie in to wider ideologies. However, it seems to me that quite regardless of its truth, or of the effect the relevant policies would have on the economy as a whole, the first view clearly favors at least the short and medium term interests of quite a lot of people. Jobs will become much more plentiful, so the unemployed will find work, and businesses will become more profitable (which should benefit those already in work, as well as business owners). This seems almost undeniable, even if the other side is right to think that the longer term consequences of increased deficits (e.g., much higher levels of inflation) will be dire. (Note also that for people who do not have much money saved, and especially those who are in debt, inflation is not such a bad thing.)

Cynic that I am, however, I find it hard to believe that proponents of the second, deficit hawk, view are merely altruistically concerned with what they believe will be the impact of current deficits on future generations, or even in future decades. After all, no economic prediction that looks very far into the future can be very definite: all sorts of unexpected event might occur - some unexpected things almost certainly will occur - to change the situation, for good or ill. I find it hard to believe that so many experts would be so keen to cut government deficits unless they thought that it would benefit them fairly directly and fairly soon. However, I do not really see what that benefit is. Will reducing deficits somehow benefit people with large amounts of invested capital? Will it somehow benefit them more than the rising share prices and higher interest rates that you would expect in a booming economy? Why (apart from abstract, theoretical reasons) does anyone want to cut the government deficit? Is it just the fact that they expect that continuing high deficits will lead to rising inflation, and that creditors lose (or do not make so much) in times of high inflation, or is there more to it? Surely they do not make much money in a sluggish economy with low interest rates either.

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If this eventually has to be moved into Great Debates, I understand, but I am really looking for a factual answer as to who benefits (and how) from deficit cutting (or, what amounts to the same thing, who is harmed, in the present or near future, by high government deficits). I am not asking why high deficit levels are a ‘bad thing’ in general.

2

Two theories, one is that all spending must eventually be paid back in taxes. Everyone knows this so that people who are planning economic activity are factoring into their ROI calculations the higher taxes. This changes those calculations and makes investments harder to justify.
The second is that the higher the deficit the greater chance that it will not be paid back. Once markets start to worry about default risk, the interest rates must rise at the same time. This makes the deficits more expensive and increases the default risk. Greece is currently undergoing this situation. If a government has its interests rates rise suddenly than it can no longer borrow to cover its operating costs and must drastically raise taxes or cut spending. This creates uncertainty and capital flight.

3

So are you saying that people who worry about the deficit do so because they think if it is not reduced now their taxes will be bound to rise in the future? Maybe some people do think that, but surely it is not what conservative, deficit-hawk economists believe. After all, it is conservatives who love to argue that reducing tax rates can actually increase revenues because it stimulates economic activity. (And to the best of my understanding, this can indeed be true in certain circumstances.) It is entirely possible that revenues can be increased without individu las paying a higher portion of what they have or earn in taxes, and conservative economists know this…

OK, that is a potential bad consequence of high deficits, albeit one that rarely actually seems to be realized. But it is not the sort of thing I asking about. I am asking about what relatively short-term benefits individuals might think they are likely to get from deficit cutting, comparable to the benefits (such as getting a job, or doing increasing levels of business) that individuals might reasonably expect to get out of deficit spending (whatever the longer-term economic consequences might be).

I am trying to understand motivation here, not economic theory as such.

4

On the contrary, a country’s borrowing rate is directly tied to the willingness of the market to lend to that country, and the willingness of the market is directly tied to a country’s financial policies (including deficit/debt ratios) and reputation.

5

Based on who’s been most vocally supporting cutting the deficit, it appears that they believe the short-term benefits are lower taxes (or, at a minimum, no new taxes), because they’ve been strident about cutting the deficit solely through reduced spending.

6

I think the most obvious benefit would be eliminating interest payments. Six percent of the federal budget is paid out in interest on money we’ve borrowed. If we paid off the deficit, we’d have no interest to pay. That’s essentially a six percent reduction in spending and taxes that we’d get for free without having to make any cuts in government services.

7

The real answer to the question you’re getting at is, “no one”, at least no one who actually derives the sort of major, tangible, short-term benefit to cutting the deficit strong enough to make them an interest group. There are lots of people who will benefit from a lower deficit of course, but the benefit will be diffuse and nebulous - public finances in general, future generations, possibly certain bands of taxpayers or spending recipients in future but it’s difficult to know who. Nevertheless, don’t be too cynical, because there are a lot of genuine deficit hawks who would like to see the deficit cut for those very reasons. There aren’t many of them in politics though.

What there are a lot of in politics, however, is opportunists, and in particular “the GOP” is probably the best answer to the cynical element of your question. The GOP has supported stimulus spending and running up deficits in modern years when it’s been in power: Reagan ran up deficits and George W. Bush turned a surplus into a deficit. In fact most of the current Republican congressional leadership voted for the policy proposals that are still the largest contributors to it: the two rounds of Bush tax cuts and the wars in Iraq and Afghanistan being the primary contributors. Dick Cheney is famously supposed to have said, “Reagan proved deficits don’t matter” when he met internal opposition to the deficit-increasing proposals he was championing. But now there’s a liberal Democrat holding the Presidency, and the public is instinctively very hostile to “the deficit” in the abstract, so it’s a convenient attack line. It’s also a convenient cudgel for opposing almost anything the majority party wants to do: anything that involves spending money or even cutting taxes can be attacked for increasing the deficit.

Another cynical answer to the question is that for some “cutting the deficit” is not the real goal, it’s partly a disguise: if your real goal is to change the way tax funds are redistributed in this country, you can use the deficit as an excuse to slash welfare spending. Once the public budget is back to the neutral again, you call for tax cuts for the upper middle-class and wealthy. Bingo, you’ve reversed some of the downward redistribution of wealth. It’s a strategy known as “starve the beast”. Furthermore for a lot of corporations and the business class, higher unemployment is beneficial because it creates competition for jobs and thus drives down wages and employee bargaining power. If it’s a choice between lower deficit/higher unemployment or using government stimulus spending to push the ratio towards the reverse, businesses would rather cut the deficit.

So there’s no simple answer to “who benefits?” from deficit-cutting in terms of short-term benefits to an interest group, but there’s the tantalising combination of political benefits and both popular and elite support, all rolled into one. That’s why you don’t hear even President Obama opposing it, in the abstract at least.

8

And just to expand on a point I touched on there but didn’t emphasise enough: the “popular opinion” part of that equation is very important. No one likes the deficit, in itself. In good times, they’re happy to ignore it because they don’t feel like they’re experiencing any negative effects from it (hence Cheney’s, “deficits don’t matter”). But in bad times, like the current economic climate, it becomes a byword for everything that’s wrong with the economy and everything that’s wrong with Washington. People instinctively compare the government to a household. In that kind of situation it’s very easy for politicians to use “cutting the deficit” as either a partisan cudgel or a convenient cover for some ulterior motive, and it’s very difficult for anyone to stand up and make a case in favor of the deficit to the public.

For instance in this famous debate clip the questioner asks Clinton and Bush how the “national debt” has affected them personally, when what she means is how the recession has affected them personally. She makes no real distinction between the two in the context.

9

Yes, and given that the US can basically borrow money for free (what are rates for US Bonds right now?), then it appears the market is pretty happy about US financial policies.
Anyway, there are of course beneficiaries of \cutting the deficit during a recession:

First of all, creditors, those who have lent money. For them, inflation is very bad, because they’re essentially getting less buying power back than they’ve lent. Getting the country out of recession runs the risk of bringing the inflation rate up. Plus, there’s always the chance that the U.S. will at some point try and pay off accumulated debt by printing more money, which guarantees inflation.

Secondly, many employers benefit from a slow economy. How many threads on this board are telling people not to make waves at work in this economy, when your boss can easily replace you with someone willing to work for less? Good times for the boss, right? (as long as he still has customers, of course).

Potentially, in other times, cutting the deficit could benefit taxpayers in general, as lowering the deficit should cut borrowing costs for the government. However, as noted above, borrowing costs are nearly zero right now, so this is a moot, theoretical point.
Now with the current attitude of “lowering the deficit is more important than the economy so we need to cut spending, but the economy is more important than the deficit so we can’t raise taxes”, there are additional winners:

So in third are those who don’t want to pay taxes, and whose benefits from government spending are unlikely to be cut even in a period of cutting government spending (I’m not saying anything about how many people actually are in this position, as opposed to those who think they’re in this position).

Fourthly there are those who the government might be forcing to spend money but won’t after cutting: for instance businesses supposed to comply with OSHA or EPA regulations, tax cheats, potentially regulated financial services companies, Ponzi schemers, etc.
And finally, it’s pretty hard to objectively deny that a poor economy going forward tends to benefit the political party out of power (mostly, this means not occupying the White House).

10

I am asking about benefits to individuals. No individuals have to pay off those interest payments. (How individuals imagine, rightly or wrongly, the payments will affect their taxes or other aspects of their lives down the line is a another matter that might perhaps be relevant.)

11

What’s the benefit of buying hamburger instead of steak (cutting back on spending) and paying down the mortgage faster? Like deficit reduction, you wouldn’t see a real benefit from that strategy for 20 years or so.

The benefit means money can be spent on more government programs or reduced taxes.

Also - the complaints about deficits are always along the lines of “how long can we keep doing this?” Notice how Obama wants to reduce the deficit by raising the taxes on people making $250,000 or more? Well, if the deficit pressure is less, the urgency to raise taxes is less - those quarter-milionaires benefit, Warren Buffet especially.

Interest rates generally depend on the overall economy. If the government is at risk of default then interest rates might rise - affecting anyone who has a mortgage, car loan, etc. Low interest rates like we see now are only if the economy is doing so badly that the government wants to stimulate growth; once growth starts, the economy recovers, the determinant for interest rates stops being urgency to stimulate and becomes desire to restrain debt growth (and inflation growth). We all benefit from lower interest rates.

the argument is also that we all benefit when entrepreneurs are less constrained by high taxes and government red tape - they go out and create jobs, and we all benefit too.

You could also consider the deficit problem like the obesity problem. Controlling it requires real self-restraint, and each extra spending program, like each extra donut, is an immediate gratification with consequences that do not add up until much later. The benefits of transgression are quick and obvious, the negative effects are long term, less obvious and slow to accumulate but harder to get rid of.

So there you go. Government spending is like donuts.