By David Weiman
Professor of Economics
Following our recent remembrance of the 9/11 tragedy, we should now turn our attention to an equally devastating tragedy unfolding before our very eyes. Since the onset of the Great Recession, the official poverty rate (a gross underestimate of the actual extent of destitution) has soared to 15.1%. Most disturbing, just over 1 in 5 children lives in an impoverished family (though by comparison only 9% of the elderly are poor). The reasons behind these trends are not difficult to discern. The official unemployment rate remains stubbornly high at 9.1%, and median family income adjusted for inflation, which stagnated during the recent expansion, has fallen sharply since the onset of the recession.
Yet, while our society is burning, policy makers at all levels of government are literally fiddling around. They are focused on pursuing an agenda that would wreak even more havoc on the US and global economies, and especially those low- and middle-income households least able to weather the storm. Like the medics of old, they are prescribing a kind of economic bloodletting, such as painful cuts to vital government programs, workers compensation, and other protections. Most troubling to me is the emerging consensus around reform, that is cuts, to entitlement programs such as Social Security and Medicare that have constituted a durable safety net for the most vulnerable in our society but also a firm financial foundation for the rest of us.
We are told that these drastic measures are necessary to put our fiscal house in order, that the federal government in particular is on the verge of bankruptcy because of runaway spending. Conveniently, we are given no empirical evidence to support these shrill claims, for the reason that the evidence simply does not exist. Certainly, we must worry about escalating Medicare and Medicaid outlays, but only because of our costly baroque health care system. As for the rest of the federal budget, the Congressional Budget Office (the authoritative arbiter on these matters) paints a starkly different picture. Total federal outlays relative to the size of the economy or GDP has actually declined since its 2009 peak and should continue to fall unless there are any major changes to tax or spending policy. Viewed another way, federal expenditures on goods and services adjusted for inflation have fallen since the end of last year.
If runaway spending is not the problem, then what caused the soaring deficits? The CBO budget analysis again furnishes the evidence. Consider 2009 when the federal deficit peaked at $1.4 trillion. According to CBO estimates, about 60% of the red ink can be attributed to the recent financial crisis and Great Recession: the contraction of the economy and the policies (such as the TARP and stimulus package) to remedy them. Clearly, these items are temporary. Although our economy is mired in the economic doldrums, it will eventually recover and cure the cyclical deficit (because incomes and so tax revenues will rise and unemployment insurance and food-stamp payments will fall). And the TARP and stimulus outlays have already ended.
What about the remaining 40% or so of the deficit? Analyses of the CBO data point to fateful policies enacted during the Bush administration: the 2001 and 2003 tax cuts and two unfunded wars. There may have been some justification for a tax cut in 2001, as the economy was reeling from the bursting of the tech bubble. But not the version proposed by Bush and adopted by Congress. It skewed the benefits to the highest income earners, who are least likely to spend their additional disposable income and stimulate the economy. And it was designed to last a decade, far longer than the recession (which officially ended in November of that year). Without judging the legitimacy of the wars, I simply observe that for the first time in our history, Americans were not asked to sacrifice -- that is, pay more taxes -- to finance these military ventures. In fact, to downplay the fiscal impacts of the wars the Bush administration (with Congress’ blessing) cooked the books by shifting recurrent war costs to an emergency account off the official budget.
Just as the 9/11 attacks on the World Trade Center demanded enhancements to our national security, the recent economic-financial crises are a clarion call to bolster our economic security. But slashing taxes and government spending and further eroding of social safety nets and workers rights are not the answer. What is called for is a new New Deal: far-sighted investments in education, basic infrastructure, research and development, especially in emerging green and mass-transit technologies, as well as expanded regulations and safety nets to ensure all Americans a decent life. Alas, our politics seem better designed to respond to war-like than economic threats. We can only hope that, just as in the 1930s, this time will be different.