Getting a Grip on Deficit Hysterics - Dean Baker

[Bill USA]

http://www.nationofchange.org/getting-grip-deficit-hysterics-1329316227

Promoting fears about the budget deficit is a major industry in Washington. The central theme is usually that we have out of control spending which will make us just like Greece in only a few short years. The policy take away from this story is that we have to cut Social Security and Medicare, and the sooner the better. This is just the idea put forth by Rep. Tom Cole (R-Okla.) in a recent piece that appeared on The Hill's Congress Blog.

Everything in this picture is wrong. The basic story of out of control deficits as an ongoing problem is nonsense. While people may have complained about the deficits in the Bush presidency, the debt-to-GDP ratio was actually falling by the end of his administration and was projected to continue to fall for the foreseeable future, even without the ending of the Bush tax cuts.

The factor that changed this picture was the economic downturn that followed the collapse of the housing bubble. The projections for deficits soared before President Obama even took office; the people who want to blame an Obama administration spending spree for the deficit are missing the mark.


The problem of the current deficit is the problem of incompetent economic management that allowed the housing bubble to grow to dangerous levels. If we were back at a more normal rate of unemployment, the deficit would be at manageable levels. The people who are upset about today’s deficits should be angry at the Bush administration and the Greenspan-Bernanke Fed. The deficit is filling the demand gap created by the collapse of the housing bubble and the resulting plunge in construction and consumption. The private sector is not going to fill this gap overnight no matter how much we might love it. In the current economic situation, lower deficits would just mean higher unemployment as the United Kingdom is trying to prove. The financial markets understand this fact, which is why they are willing to lend the United States huge amounts of money at very low interest rates (unlike Greece).
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