Do deficits matter? Yes, and here’s the real reason why

Everyone seems to have an opinion these days on how to fix the US government’s debt issues. But these two paragraphs below, from Simon Johnson and James Kwak’s White House Burning, might be the best description of the issue I’ve read thus far:

Every time growth goes down and deficits go up, we’ll cut spending on government services and make modest reductions to Social Security and Medicare benefits. Growth will return as the business cycle turns up, deficits will come down for a few years, and the national debt will fall off the political agenda. But then deficits will come back because of a recession or because of demographic and health care trends. Then we’ll repeat the process, cutting spending some more. Each time, services and social insurance programs that lower- and middle-income people depend on will bear the brunt of the spending cuts, eroding away our already modest social safety net. Since many government programs, broadly speaking, distribute money from the rich (who pay more in taxes) to the poor (who benefit more from social insurance), these periodic rounds of deficit cutting will have the net effect of reversing this flow, shifting resources back toward the rich and increasing inequality above its already historic levels. A few rounds of this and the United States will look like a stereotypical Latin American country, with the super-rich living on private islands in the Caribbean, a comfortable professional class that holds the desirable jobs, and a large, struggling lower class.

America does face a long-term debt problem. Today, the specter of the national debt is a blunt instrument that is used to block needed investments and chip away at the modest programs that benefit the poor and the middle class. As long as we face the prospect of significant long-term deficits, our political system will continue to be dominated by hysteria, demagoguery, and delusion. Given the current balance of political power, the most likely outcome is that government deficits will be invoked to slash spending that ordinary people depend on — while continued tax cuts ensure that the deficits never go away. In other words, if we don’t solve our debt problem the right way, it is certain to be solved the wrong way. Our challenge is to defuse our national debt crisis in a way that is credible and fair, that maintains our ability to make vital productive investments, that preserves the services that most people value and depend on, and that encourages economic growth for decades to come.

This is basically the same argument I tried to make a while back, in the context of decaying public services. The poor and middle class disproportionately rely on those services, whereas the rich are impacted very little. (Think of someone who needs a publicly-funded commuter train or bus to get to work, compared with the person who takes a chauffeured car.) Because the former group lacks a political voice, they will always lose out when the debate shifts to how to fix the budget gap, probably in the form of cuts to services that the rich don’t need.

On the current path, years from now America will still be a good place to live for those who have money, but will be increasingly hard for those who don’t. I feel this in a very real way in my own life. My son will start going to school in about three years, and college in about 15. Because so many public school systems around us are subpar, if we want him to get a first class education we must either stretch financially to buy an expensive home in a rich town populated by bankers and hedge fund managers, or pay through the nose for private school. Then there’s the cost of college, of course, which if current trends persist would be about $400,000 by 2030. Mind you, we’re talking about one kid here. And that’s just education. We haven’t talked about things like the rising cost of healthcare (our family’s premiums and annual deductible together will rise about $2,000 next year), or whether or not Medicare and social security will be around when my wife and I retire.

Then I wonder: If someone like me, who works for an investment bank and makes six figures, has anxiety about this, what about everyone else? For me, there’s a conceivable way forward if current trends continue, which is simply to double down on my career, make as much money as possible, and hope to vault my family into the next tier of financial comfort. But not everyone can do this. The typical factory worker or career waitress don’t have this option.

If we don’t shift course, then the lingering debt issue runs the risk of turning us into one huge banana republic, basically a country where the upper class has it good but everyone else struggles. But at some point, even the wealthy will find it hard to make money in an economy with a hollowed-out middle class. And besides, no rich person really wants to live in a country that’s crumbling beyond the gates.

That’s why it’s important to get real about our fiscal problems, in a fair way. Otherwise this country won’t be a nice place to live for, well, anyone.

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