Avoid deficit phobia

By Josh Bivens

President Obama is clearly right — slashing budget deficits now would strangle a fragile economic recovery and do nothing to address the actual budget challenges facing us.

OUR VIEW: European nations show way toward fiscal responsibility

When the recession hit in December 2007, revenues cratered and safety-net spending rose, increasing the deficit. To avoid a downward spiral into depression, Congress passed explicitly temporary policy initiatives such as the Recovery Act.

And they worked; the non-partisan Congressional Budget Office (CBO) estimates that the law has created or saved 3.5 million full-time jobs so far. In other words, today's deficits are overwhelmingly a temporary result of, and response to, the Great Recession, and they will fade as the economy recovers.

If a healthy recovery takes hold, the CBO projects that revenues will rise, spending will fall and the need for temporary stimulus will fade, so that by 2014 the deficit will be 60% lower than it is now, even if two-thirds of the Bush tax cuts are preserved.

Pretty much all serious budget wonks know that the real budget challenge facing the U.S. is that runaway health costs make deficits in 2025 and beyond start to look genuinely troubling even during economic expansions. So why should we reverse economic stimulus today when the real budget challenge is decades away and all about health care?

The standard answer is that imposing this pain today will convince a jittery bond market that tomorrow's budget crunch will be addressed. Maybe. But today's historically low long-term interest rates don't really signal a bond market that's all that jittery. I'd rather take my chance with potential rather than guaranteed pain. Who wouldn't?

Germany and England, for two. But even if they're wrong, is it America's place to lecture them? Actually, yes. If the United States pursues growth in the short-term while major global peers do not, this means that we go right back to the destructive pattern of global behavior that laid the groundwork for the Great Recession: The United States becomes the globe's consumer of last resort and large economic imbalances reappear, setting up the global economy for another fall. Destructive deficit phobia is absolutely our business, wherever it's being practiced.

Josh Bivens is an economist for the Economic Policy Institute, a liberal think tank in Washington, D.C.

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