Republicans, and some Democrats, in Congress argue for immediate and sharp cuts in the deficit based upon three premises: (1) the debt crisis is largely due to an unwarranted explosion of government spending, (2) immediate sharp reductions in government spending are necessary and will help the economy grow faster in the short run, and (3) deficit reduction should and must be accomplished largely, if not exclusively, through spending cuts rather than tax increases.
In recent testimony before the Joint Economic Committee, Chad Stone, chief economists at the Center on Budget and Policy Priorities, explained why, in the opinion of America’s top economists, these premises are wrong. Furthermore, Stone warned Congress that the consensus view of America’s economists is that an immediate focus on deficit reduction, particularly through spending cuts alone, will very likely do more harm than good and could make true deficit reduction harder to accomplish in the long run.
Here are some excerpts from Stone’s testimony.
Policies enacted since the 2008 election are not the main drivers of deficits and debt . The U.S. fiscal imbalance problem is a long-term problem that has little to do with the short term imbalances that have emerged as a result of the financial crisis and Great Recession. The main driver over the long term is unsustainable growth in health care costs throughout the U.S. health care system, in the public and private sectors alike. Increases in the deficit due to policies enacted over the past few years are temporary and only their relatively modest associated interest costs add to longer term deficits.
The economic downturn, tax cuts enacted under President Bush, and the wars in Afghanistan and Iraq explain virtually the entire federal budget deficit over the next ten years.
Ongoing increases in deficits and debt [did not] arise mainly as a result of policies instituted since President Obama was elected.
The recession and actions taken to combat it added temporarily to the deficit and bumped up the level of the debt, but the long term problems that were evident in 2007 remain the major drivers of the long term deficit.
Take away the Bush-era tax cuts, and budget deficits are significantly smaller over the rest of this decade and the debt is stable (rising only about as fast as the economy is growing) over the second half of this decade.
Large immediate cuts in government spending will hurt the still-fragile economic recovery. Economic and budget conditions in the United States are very different from those in countries deemed to have had successful fiscal adjustments. Looking at the empirical literature on "expansionary austerity," the International Monetary Fund found little empirical support for the idea that immediate sharp reductions in government spending strengthen an economic recovery. The Congressional Research Service found that fiscal adjustments beginning in a slack economy such as the United States is now experiencing have a low probability of success.
Evidence that cutting spending increases GDP in the short term is very weak.
Evidence that a deficit-reduction program focused on spending cuts can promote short-term growth and long-term fiscal stability is slim
U.S. macroeconomic and budget conditions aren't right for sharp spending cuts.
The United States experience in the 1990s is a good example of successful deficit reduction followed by a sustained economic expansion. Bipartisan negotiations produced a budget agreement in 1990 that included both tax increases and spending cuts as well as sensible budget enforcement procedures that provided a useful for framework for achieving meaningful deficit reduction. The 1993 deficit reduction act was passed without bipartisan support and amidst dire warnings from opponents that the tax increases on the richest 2-3 percent of taxpayers would throw the economy back into recession. In fact, the United States enjoyed its longest economic expansion on record and the budget was balanced for the first time since 1969.
Sharp concluded with this warning:
Cutting budget deficits too rapidly under current U.S. economic conditions is most likely to hurt the economy and ultimately be unsuccessful. If we go down this path, I'm afraid the lesson will be "Spend Less, Grow Less, Slow the Economy."
Bottom-line: Once again we have an authority sharing with Republicans the consensus view of the America’s top economists that the Republican plan to enact immediate and severe cuts in spending is not only the wrong thing to do but will actually damage the U.S. economy in the short term, increase unemployment and make long-term deficit reduction even more difficult, if not impossible. Once again, the Republicans are refusing to listen. The only conclusion that we can draw from their refusal to heed the advice of America’s economists is that Republicans are NOT really interested in deficit reduction and DO NOT want to create jobs. It is increasingly apparent that Republicans are doing all they can to damage the economy and INCREASE unemployment on the theory that a crippled economy coupled high unemployment will enhance the chances of Republicans winning seats in Congress and, perhaps, control of the White House in 2012. Republicans are placing politics above what is right for the country.
Click here to read Stone’s testimony in full: http://www.cbpp.org/cms/index.cfm?fa=view&id=3516