A new study just released by the Economic Policy Institute shows that No/Nothing Republicans are totally wrong about the dangers of the current and future deficits. Economist Josh Bivens who wrote the study says:
“The notion that all deficits are bad is a simplistic political idea that flies in the face of sound economic theory and economic history…In an ailing economy deficit spending is an essential tool for getting the economy off life support and back to health. When the economy is stronger, and private and personal spending have resumed normal levels, it’s appropriate and desirable for the government to scale back. But right now the greatest danger regarding deficits is that they will be too small to provide the public relief and investments the economy needs.”
Key findings from the Bevins study include the following:
CURRENT DEFICITS DO NOT POSE A THREAT TO THE ECONOMY OVER THE NEXT FEW YEARS, THE REAL DANGER IS THAT THERE WILL NOT BE ENOUGH DEFICIT SPENDING TO SUSTAIN THE RECOVERY: As long as there are idle resources in labor and capital markets and interest rates controlled by the Federal Reserve are at or near zero, none of the negative outcomes feared from running larger deficits will come to pass. For the next year or two at least, the biggest threat regarding deficits is that they will not be large enough to support the public relief and investments needed to pull the economy into a sustained recovery and provide the 10 million-plus jobs necessary to restore the U.S. labor market to its pre-recession strength.
THE STIMULUS WILL HAVE LITTLE LONG TERM IMPACT ON BUDGET DEFICITS: Supporters of the American Recovery and Reinvestment Act (ARRA), enacted in February 2009, argue that it was necessary for pulling the economy out of its downward spiral. Critics of the Recovery Act argue that it contributes too much to rising federal deficits, and that these deficits will prove disastrous to the American economy. But the Recovery Act will have only a small impact on the overall budget deficit, even in the short run. In the longer run (over the next decade or more), when the economy will have presumably recovered and concerns about budget deficits may be legitimate, the Recovery Act has no effect at all.
HEALTH COSTS ARE THE REAL DRIVER OF LONG TERM DEFICITS WHICH MAKES FUNDAMENTAL HEALTH REFORM VITAL: Deficits in the long run are driven almost entirely by spending on Medicare and Medicaid. Without these programs, the federal budget (excluding interest payments) would be in surplus indefinitely. Since the rise in Medicare and Medicaid spending is driven by the economy-wide rise in health costs, fundamental health reform that reduces the cost of health care is the key to long-run budget balance.
THE U.S. IS NOT RELYING OF FOREIGN INVESTORS TO FUND THE DEFICIT: The United States has not had to rely on foreigners to finance the rise in government deficits in the past year-and-a-half. Private domestic savings in the United States have expanded faster than government borrowing in the past year. In other words, there is no shortage of domestic residents willing to hold government debt right now.
THE BIGGEST DRIVERS OF DEFICITS ARE THE BUSH TAX CUTS; UNNECESSARY AND COUNTER-PRODUCTIVE BUSH WARS, AND ILL CONCEIVED AND UNFUNDED BUSH MEDICARE PRESCRIPTION DRUG BENEFIT. TRUTH: WITHOUT BUSH AND REPUBLICAN SPONSORED POLICY DISASTERS DURING THE 2000sTHERE WOULD BE NO DEFICIT: The single biggest policy change [contributing to deficits] was the string of tax cuts passed over [the Bush years], which explain almost half of the policy-driven declines in budget balance. Increased defense and security spending (including the wars in Iraq and Afghanistan) explains roughly a third of this increase, with the rest consumed by the new Medicare prescription drug benefit (created without a revenue source) and other miscellaneous policy changes.
Read the full report here: http://epi.3cdn.net/1616707e0c784d8134_4nm6becsb.pdf