Yet another bait-and-switch on the way


The infrastructure in the US is in sad shape and requires massive expenditure to upgrade it. The Obama administration, like pretty much everyone else, knew that and tried to push for such spending but the Republican majority in Congress thwarted it at every step for three reasons. One is that they had made it their policy to oppose Obama on anything that did not benefit the oligarchy. The second was to deny Obama the opportunity to point to any kind of success anywhere. And the third was because such spending would stimulate the economy and create jobs and make people think the economy was improving.

The weapon the Republicans used to thwart these plans was the deficit, arguing that this was a great burden that was being placed on future generations and that any new expenditure had to be met with budget cuts elsewhere, especially on programs that benefit the poor. The fact that the absolute value of the deficit is not the relevant measure but one should instead look at the deficit as a percentage of GNP was ignored. That percentage is not that large by historical standards.

It is illustrative to look at the deficit as a percentage of the GDP over time. For 2016 it is 3.2% of GDP. During the Obama administration it reached a high of 9.8% in 2009 following the financial crash but has come down since then. During the Reagan years it went as high 5.6% in 1983. George W. Bush inherited a surplus but his wars took the deficit to a high of 3.3% in 2004. It was 26.9% in 1943 during World War II. Another factor to consider is that with interest rates having been so low at almost zero, the past decade would have been a good time for the government to borrow money to pay for infrastructure improvements.

Even for those genuinely concerned about the deficit, the logical solution of raising taxes was out of the question, especially income taxes that are progressive in their impact, though they are open to regressive consumption taxes on everyday items that hurt lower income groups more.

But now that the Republican will control the presidency and both houses of Congress, those pious statements about the evils of budget deficits will go out the window and we can expect to see a spending spree. How will they justify this reversal? Easy, the way they have always done. They will use the same Laffer-curve magical thinking that they have done for such a long time. They will say what they said about tax cuts for the wealthy, that this would spur such immense growth that it would generate new tax revenues despite lower rates that would more than compensate for the increased spending. A win-win! Then when the predicted revenue increases don’t happen, they will again raise the specter for deficits and call for cuts in services provided to lower income people and to Social Security and Medicare and Medicaid

We are seeing this play out in Ohio. During the first part of John Kasich’s tenure as governor, the economy was doing well, tax revenues were high, and there were budget surpluses. So he and the Republican legislature handed out big tax cuts to the wealthy. Now the economy is doing poorly, tax revenues are down, budget deficits are looming, and he warns that the state is on the verge of a recession. So what does he propose? Reversing the tax cuts? Don’t be silly. He is proposing cuts to services.

This is the perpetual bait-and-switch, anti-Robin Hood con game that results in diverting money from the poor to the rich.

Donald Trump has nominated South Carolina congressman Rick Mulvaney to be his director of the Office of Management and Budget. He is supposed to be a deficit hawk but that is just window dressing. He will be used to sell this magical thinking to the rubes who think that the deficit is a big problem when it is not.

Comments

  1. Mark Dowd says

    And the first thing about that to talk about is that we don’t spend any money at all on defense. It’s offense.

  2. Lassi Hippeläinen says

    Real fiscal conservatives would admit that defense expenditures are a Keynesian market intervention using taxpayer money.

  3. Pierce R. Butler says

    … the absolute value of the deficit is not the relevant measure but one should instead look at the deficit as a percentage of GNP …

    IANA Economist, but I think that formulation neglects a key component: the accumulated national debt matters more than the yearly deficit, and that latter has mushroomed majorly during each of the 20 years of the past three Republican presidencies and (iirc) grew during all but two of the 16 years of the last two Democratic regimes.

  4. raven says

    They are planning to attack Medicare and Social Security.

    These programs don’t cost the government anything. The taxpayers do get money out of them. That the taxpayers…paid into them.
    Social Security is good until 2033. Medicare with the ACA modifications is good until 2029. In political terms with our planning horizons, this is near infinity.

    The last time the GOP tried to abolish Medicare, they lost control of congress in 2006. Old people vote and they like their benefits they paid for. Will it happen again?
    Got me. In Crazyland USA who knows?

  5. raven says

    the accumulated national debt matters more than the yearly deficit

    That isn’t known for sure.
    I read Rogoff and Reinharts book on that. Which was illuminating in that it was shortly afterwards proven to be wrong.

    No one knows how high the National Debt has to go before it becomes a drag on the economy. Most economic models say around 100% of GDP where we are right now. But so far, that hasn’t been seen in the real world.

    The only way to find out is to keep running it up until something shows up.

  6. raven says

    We are seeing this play out in Ohio.

    It also played out in Brownback’s disaster in Kansas. Louisiana with Jindal. Wisconsin with Scott Walker.

    And oh yeah, Minnesota raised taxes. They are doing well.

  7. Pierce R. Butler says

    raven @ # 6 – As you so kindly refrained from mentioning, I screwed up my referents in # 4: the “latter” I had in mind was the total debt, not the annual deficit, though my sentence structure had it otherwise.

    Given how much we now spend on interest to service the national debt, and how much of that goes overseas, and our economic vulnerability if any large bondholder decided to do a major dump, I do think this constitutes a serious economic weak point (surely to be made much weaker starting next month).

    That type of expenditure may produce less of a ripple effect than even military spending, and quietly trickles lots of money uphill to the megamoney people – the same GrOuP, curiously enough, who mostly pay for and partly control the political faction which has done most to balloon the debt since, say, 1980.

    Pls recall that the total debt (primarily due to underwriting the American Revolution), much more so than the year’s budgetary strains, generally gets the credit for the collapse of France’s ancien régime in 1789.

  8. Trickster Goddess says

    arguing that this was a great burden that was being placed on future generations

    Future generations will benefit from the infrastructure we build today, so why shouldn’t they help pay for it?

  9. mnb0 says

    It’s the biggest lie of right wing populists. Not only in the USA, also in other countries (like The Netherlands) they are the biggest spenders. Already in 1981 I predicted that American budget deficit would increase due to Reagan, just like from 1977 on The Netherlands had the biggest budget deficit in history thanks to the right wing populists Van Agt and Wiegel. It took the Dutch economy about 10 years to recover.

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