Tuesday, December 1, 2009

The Dual Deficit Problem

By Tom Kando

Nowadays, everyone is raving about “the” deficit, especially conservatives, and the consensus is that the fault lies with Obama’s irresponsible fiscal policies.

Because the conversation about “the” deficit is so poorly informed, I begin with a few basic facts:
“The” deficit problem is a dual problem: (1) There is the federal government’s increasing debt, caused by the fact that it spends more than it takes in through taxes. (2) There is America’s growing debt to the world, caused primarily by our balance of trade deficit. That is, the fact that you, I and the other 310 million Americans spend/buy more than we make/sell.

(1) The federal government’s debt is now 13 trillion, three times larger than it was ten years ago. Next year it will reach 14.5 trillion, up 1.5 trillion in one year. During the Bush years, it grew by nearly half a trillion in some years.

(2) The trade deficit has grown, during the past decade, by 700-800 billion per year. Because of the recession, 2009 is a little bit better: this year, we are only 300 billion short. Warren Buffet has estimated that by 2006, the rest of the world already owned 3 trillion more of America than America owned of the rest of the world. By now, the figure is probably around 5 trillion. Who owns us? China & Co. (Japan, Korea, Singapore. Etc), the Middle East, Europe.

Why is suddenly everyone turning into a fiscal conservative and an economic expert? Nowadays, aunt Mabel knows all about the federal budget deficit, and its dire consequences.

True, the fed deficit is getting huge, and it’s a real problem. But keep in mind that federal spending has been out of control for many years. President Obama didn’t start it. Conservatives were okay with deficit spending under Bush, as long as it was for war and tax cuts for the rich. But now that it’s for health care and jobs, they are against it. Such priorities are warped.

Granted, the deficit has gotten a lot worse recently. But it had to. The Obama administration inherited the worst recession in 70 years. Stimulus spending was essential. We need more of it.

The sudden public awareness of the deficit problem is fed by the conservative propaganda machine. Aunt Mabel and all the other new experts are only mouthing off what they heard from people like Glenn Beck. Proof of this is that very few people worry about the other deficit, the trade deficit. According to Warren Buffet, in the long run the trade deficit is a bigger problem than the government deficit. This deficit has nothing to do with the policies of the Obama administration, which is in fact trying to reduce it.

There is a simple solution to the federal budget deficit: Raise taxes. The mantra that lower taxes increase business activity and therefore tax receipts (the Laffer Curve) is an act of faith and a smokescreen, not science. Germany, Canada and many other countries combine higher tax rates and greater business productivity.

There is no solution to the trade deficit, as long as you and I are determined to spend more than we make. leave comment here