Fear the Spending Cuts Mantra

Over the last few years, Washington political types have become increasingly concerned about large deficits and the subsequent increase in government debt. The rhetoric of those pushing for deficit reduction—the so-called deficit hawks—has grown more apocalyptic, with some prophesying that the United States was on the verge of collapse due to its debt burden and calling for sweeping action.

These warnings are wrong, and the suggestion that we undertake massive spending cuts is dangerous and misguided.

The Deficit Hawks: A Recent History

Deficit hawk rhetoric characterized much of the 112th Congress, which waged dramatic fights over spending. Those fights came to a head in the summer of 2011 when the Congress passed the Budget Control Act, the piece of legislation that brought us the supercommittee and the sequestration. Since that time, the deficit reduction debate has become a defining element of Washington politics. The deficit reduction obsession colors nearly all legislative action, from the manufactured crisis of the “fiscal cliff” to the Hurricane Sandy relief package.

The various positions on deficit reduction coming out of Washington serve as useful proxies for broader ideological positions. The political shorthand on deficit reduction plans suggests that Democrats are generally against reduced spending and that the Republicans are against increased revenue—in other words, each party is opposed to one of the two avenues that are necessary for deficit reduction. Those that offer some mix of the two have generally been considered the moderate voices on deficit reduction.

Of course, the reality is more nuanced than the short-hand allows. The Democrats have offered plans that balance spending cuts and revenue increases, and President Obama has signed relatively substantial spending cuts into law. Republicans have also agreed to a (fairly small) increase in revenue—at a ratio of 3:1 in total spending cuts to increased revenue.

The Case against Spending Cuts

However, the current state of the deficit reduction debate is almost exclusively focused on the need for further cuts. Indeed, most of the recent issues arising from the deficit reduction debate boil down to a steadfast unwillingness among Congressional Republicans to agree to any increased revenue toward deficit reduction.

The shift from a balanced fiscal restructuring—combining revenue increases and spending cuts over the next ten years—to one that favors spending cuts as the main path toward deficit reduction is deeply troubling. Enthusiasts of spending cuts offer unhelpful analogies based on presumably “common sense” appeals, such as likening the budget to a household’s finances. But hiding behind those appeals is the plain fact that we have considerable economic and budgetary evidence that suggests that spending cuts are deeply harmful:

• Assertions that government spending has grown wildly over the last few years have been proven false.
• Arguments concerning a potential debt crisis caused by a sudden turn in the market for government debt are without merit.
• Interest rates have remained at historically low levels, even after a credit downgrade following the summer 2011 debt ceiling battle.
• Inflation has remained low—indeed, it has often fallen below the Federal Reserve’s inflation target over the past few years.
• Suggestions that government borrowing is crowding out private borrowing appear to be baseless.
• The CBO has projected that government debt-to-GDP levels have been largely stabilized over the next decade.
• Evidence from Europe’s austerity experience has borne out the relevance of Keynesian ideas concerning the harmful effects of dramatically reducing government spending in a weak economy.
• One the concerns most often cited by deficit hawks, that of the growth in health care costs and the increasing burden of entitlement programs, is based on projections that fall outside of the next ten years—into 2025 and beyond—calling into question why such concerns should take precedence over responding to the current economic crisis: persistently high unemployment and low economic growth.
• And the CBO has recently revised projections of health care costs downward, showing an estimated reduction in health care costs of $200 billion, a cost reduction larger than that of raising the Medicare eligibility age from 65 to 67. Health care cost projections have been revised downward by $511 billion since 2010.

Spending Cuts Are Harmful to the Economy and to Debt Reduction

So, the debate has shifted toward deficit reduction only by way of spending cuts amidst growing evidence that such cuts are contractionary. Worse still, because these cuts focus on spending in general rather than on reforming entitlement programs, they fail to address the core issues that confront the long-term sustainability of U.S. government debt. Indeed, the CBO projects that discretionary spending, will be 30 percent below its 100-year average by the year 2023. Yet lawmakers continue to target discretionary spending cuts rather than making the tough political choices over entitlement spending.

We are left to face dramatically reduced spending on essential functions of the federal government without ever really addressing the nation’s long-term fiscal health.

Deficit reduction that causes short-term economic pain will only make future debt reduction that much harder. Conversely, a sensible approach to deficit reduction would spur economic growth and job growth, which will in turn reduce deficits and reduce the debt burden.

By contrast, deficit reduction focused solely on drastic cuts to spending appears doubly foolish.

Tags: sequester, byron, spending cuts, budget