In Tom Stoppard's brilliantly inverted Rosencrantz and Guildenstern Are Dead, two minor characters usurp the play, while the main action of Hamlet occurs offstage. In today's debate about the economy, obsessive concern about deficits and debts are Rosencrantz and Guildenstern -- dominating the narrative, while the more immediate and urgent issues of economic recovery are weirdly out of reach.
In the narrative of fiscal conservatives, the road to recovery is paved with sacrifice -- budget balance rather than job creation, fiscal freezes well before the economy has returned to full employment, long-term cuts in entitlements, and automatic triggers if Congress misses a preset target. A presidential fiscal commission, most of whose members accept this broad story, is due to report by Dec. 1.
This premise has infected elite opinion to the point where even some Democrats are entertaining needless cuts in Social Security as proof of their fiscal toughness. As a faded "recovery summer" gives way to a chilly election season, the Obama administration finds itself painted into a corner by concern for these views, reluctant to propose stronger medicine that might temporarily increase deficit spending.
The austerity argument defies economic logic. The economy is performing far below capacity. To break the vicious circle of high unemployment, depressed consumer demand, weak business investment, and damaged banks, government should be doing more, not less. State and local budget cuts, totaling $460 billion over three years, neutralize about two-thirds of federal Recovery Act spending. President Barack Obama's February 2009 stimulus package helped, but not enough to solve the problem.
How can deficit hawks recommend austerity as a tonic? Supposedly, we need belt-tightening to restore confidence that inflation is not around the corner, so that businesses will invest and foreigners will keep buying America's bonds. But interest rates are at record lows, prices are flat, the deeper worry is deflation, and businesses fail to invest or hire because they don't see customers, not for fear of possible inflation 10 years down the road.
The purpose of this special report by The American Prospect is to relaunch the debate and disentangle several separate questions: What is the proper sequencing of recovery spending and deficit reduction? How much social investment does America need, short- and long-term? How best to pay for it? Where do Social Security and Medicare fit into this story?
We certainly need better fiscal balance once the economy recovers. Indeed, it will be much easier to restore normal budget discipline when workers are earning wages and paying taxes rather than drawing unemployment checks (or not), and businesses are making profits and contributing revenues rather than laying off workers.
As the articles in this report demonstrate, it makes more sense to increase public spending now for jobs and social and physical infrastructure -- and then get debt back down to a lower share of gross domestic product after the economy is performing well. Indeed, the economy won't return to robust performance without increased federal outlays.
An entirely separate argument is about social investment for the long term once recovery comes. Here, too, the real debate has been muddled, as if reduced spending necessarily equaled reduced deficits. Of course, the budget can be in deficit while government spends only 15 percent of GDP, or in surplus with public spending of 25 percent. The issue is whether the spending is paid for. The Germans spend a much higher share of GDP on social investment than we do and yet are very prudent fiscally.
America's more serious deficit is one of inadequate social investment -- in children, worker skills, basic public facilities, and the advanced infrastructure of the 21st century. The long-term health of the economy depends on these outlays. It is a mistake to view spending only as "stimulus" for the economic emergency -- and then to revert to our normal underinvestment in people and social overhead once the immediate crisis ends.
That in turn raises the question of taxes -- the second debate that should be made explicit. America's taxes on the top brackets have been drastically cut. There is plenty of room to restore such taxes to finance needed social outlay without further taxing the vast majority. There is also easy money to be gotten from pursuing offshore tax shelters and other forms of tax evasion used mainly by the very rich. Other potential sources of revenue, such as an anti-speculation tax on short-term financial transactions, would increase the economy's efficiency as well as raise needed receipts. In short, we need revenues to underwrite adequate social outlays, not just to cover current deficits.
Will the public support tax increases, even for the very top? In Oregon last January, a coalition of good-government groups persuaded voters in a referendum to raise taxes on corporations and on households earning more than $250,000 a year rather than cut valued social spending. The measure passed 54-46, plugging a $727 million shortfall that would otherwise have required an austerity budget. Progressive taxation as an alternative to program cuts polls well nationally. What it takes is political leadership.
Social insurance is a prime nemesis of fiscal conservatives. The third question concerns the role of Social Security and Medicare in the nation's fiscal balance. These, however, are two very different programs in different fiscal condition.
Medicare does face a looming shortfall in this decade, but rising costs in the Medicare program reflect the larger inefficiencies of the U.S. health system. Medicare's own costs actually have increased at a slower rate than health costs as a whole, and the recently enacted health reform will slow the rate of increase. What's needed are broader reforms to the health system, not more cuts in Medicare benefits.
Social Security, by contrast, is close to long-term balance. Its projected 75-year shortfall is 0.6 percent of GDP, a shortfall that sounds more like a rounding error. Nobody can realistically forecast the economy 75 years out, and the Social Security actuaries use fairly dour projections of economic growth and wage growth. If wage growth had been rising in tandem with productivity growth, as it did during the post-World War II boom, Social Security would look forward to endless surpluses. Even if wages and growth rates remain fairly depressed, as the projection assumes, Social Security can be restored to balance by raising the base on which Social Security wages are taxed.
Social Security is in surplus for nearly three more decades, so its long-term balance has nothing whatever to do with the arguments about the supposed connection between fiscal restraint and economic recovery. It's not as if entrepreneurs contemplating whether to invest are worrying about Social Security's condition in 2037.
Why, then, is this debate so oddly miscast? The answer is a disparity of influence.
For fiscal conservatives, the prolonged recession is an I-told-you-so moment. For several years -- decades in the case of billionaire investment banker Peter G. Peterson -- the storyline promoted by Wall Street and its congressional allies has been that unsustainable "unfunded liabilities" run up by entitlement programs were imperiling our economic future. Interest on the debt would depress other needed outlays. Federal claims on money markets would crowd out productive borrowing and raise interest rates for all. The only cure was to rein in spending, perhaps complemented by regressive tax increases such as a value-added tax.
But when the crisis came, it had nothing to do with imagined future debts and everything to do with excesses in the financial system. But because the crisis itself caused federal revenues to plunge and necessitated emergency deficit spending, the fiscal hawks felt vindicated. And so their story, rather than being discredited by events, gained currency.
If you look out at the real economy, rather than through the green eyeshade of deficit anxiety, you see needless devastation. You also see a political trap for Democrats and progressives. If deficit-reduction is paramount, then little can be done to revive the economy, and the fiscal right ends up in an odd alliance with the hard-core right to stymie the progressive alternative.
The human and political tragedy of the narrowed fiscal debate is that viable remedies that we need to restore America to economic health have been shoved offstage. In reading much of the commentary, you would think that past excesses leave us with no choice other than years of suffering. But there is a high road to fiscal balance that begins with economic recovery and finances productive social investment with progressive tax revenue going forward. If we keep to this road, the debt recedes, both as a bogeyman and as a reality.