President Obama faces a strangely familiar problem in proposing a federal budget this year: fostering a sound economy while appealing to a political climate that detests many of the measures necessary to encourage economic growth. The voters demand deficit reduction, but also economic recovery. The main problem is that austerity measures (drastic spending cuts) decrease the deficit in the short run, but they don’t promote growth.
Deficit spending is actually quite normal for an economic recession — revenues are lower, reliance on safety net programs is higher and encouraging growth requires government spending. When the economy gets back on its feet, the deficit goes down because tax revenues increase even if you don’t raise tax rates. But the U.S. federal government is now being forced to lower its deficit in the midst of a vast recession, leading the president to fight a two-fronted war. His proposed budget is a laudable attempt to address concerns from both sides.
The undersized stimulus package has convinced Americans that government spending doesn’t spur growth, but modern economics holds that encouraging growth requires some government investment. The budget allocates $350 billion to building roads, rails and schools in the hopes of injecting money into the economy and providing much-needed jobs to skilled workers. Manufacturing will be aided through tax incentives and research spending. And because an “economy built to last” requires educated workers, the Pell Grant program is being maintained and $8 billion is being sent to help community colleges (one of the linchpins of social mobility in our society).
Relax, though; the proposed budget includes some major cuts too. With the Iraq War over, the Afghanistan War winding down and consensus forming that we’re no longer in the Cold War, defense cuts were more than called for. It’s important to keep Americans safe and free and soldiers well-paid and well-fed, but we can do that at much lower levels than what we’re spending on the Pentagon right now. The budget cuts $70 billion from research & development and $108 billion from arms procurement. Medicare and Medicaid, the ever-popular “entitlement programs,” are not being cut per se, but their growth is stunted. We’ll see $1.8 trillion in spending on these programs — an 8.4 percent increase from last year — which is less than expected increases.
Contrary to the Republican stump speech, deficit reduction will require some tax increases. Luckily, these are likely to come from the wealthy, as well as from oil and gas companies who’ll see their loopholes evaporate should this budget pass. I’ve previously called the capital gains tax the biggest “tax loophole” in America today. I’m proud to announce that the White House is proposing that taxpayers making over $250,000 a year have their dividend income taxed at the same rate as normal income. That’s only fair.
Overall, the budget would cut $4 trillion from the deficit over 10 years. Unlike Republican proposals, it won’t balance this on the backs of poor and middle-class taxpayers, and it would invest in a sound economic recovery. Jackie Calmes of The New York Times notes, “What makes Mr. Obama’s effort stand out is the sheer size of the proposed deficit reduction as the nation emerges from the worst economic crisis since the Great Depression, a crisis that resulted in lower revenue for the Treasury and large doses of temporary spending and tax cuts to keep the economy from collapse.”
— Daily Nexus liberal columnist Geoffrey Bell
In Response, Right Said:
My counterpart is right to point out that austerity is thought to harm economic growth. However, he and the president ignore two vitally important facts.
First, Keynesian economics (a.k.a. massive deficit spending in the name of “stimulating” the economy) has never worked at any point in American history. It didn’t work when FDR raised government spending to unprecedented levels in the 1930s; it hasn’t worked over the past three years with the stimulus project. In fact, President Obama’s first day in office remains the lowest point of unemployment in his presidency.
Second, they ignore that the president’s spending binge is, in the opinion of almost any economist, increasing our debt to the point that national debt is actually slowing the economy down. In fact, the Congressional Budget Office projects that if large budget deficits continue, as this “responsible” budget does, the economy will actually crash in 2027.
Contrary to the Democratic stump speech, deficit reduction does not require job-killing tax increases. Fundamental reform of the U.S. tax system that eliminates loopholes and lowers rates to competitive levels would not only be deficit-neutral, but would promote explosive economic growth. True reform to Social Security, Medicare and Medicaid would preserve those programs for those who need them, as well as bring government spending down to manageable levels in the long term.