Deficit Hawk Hysteria
The deficit hawks are flapping their wings and making a terrible squawk about the government's gusher of red ink. Good grief, a federal deficit of $1.4 trillion! What will become of us?
The gloom chorus includes GOP heavies and right-wing frothers, the editors of the Washington Post and other pinch-penny establishment journals, Blue Dog Democrats and even some of Barack Obama's own advisers. Never mind the bloody mess we're in, they insist. People should hunker down and accept their pain. Suffering is good for the soul.
This nonsense, grounded in ignorance and discredited nineteenth-century bromides, is a recipe for continuing the economy's downward spiral and could prove poisonous for the country. The hawks claim self-righteous rectitude in their warnings, but their real intent is to stymie the very spending programs that can deliver economic recovery and relief to battered citizens. Whining about deficits is a way to halt promising talk about another substantial stimulus package, one that should be focused more concretely on job creation. That will require more deficit financing, for sure; but at a time when unemployment hovers near 10 percent and foreclosures are in hemorrhage, more is needed.
In an October 21 editorial arguing against just such additional spending, the Post warned citizens to disregard progressive commentators (like myself) who offer the example of World War II, when the government ran deficits many times larger than the current one. "In the deficit debates to come," the Post insisted, "Mr. Obama should heed the hawks."
Wrong. The mobilization for World War II produced one of the most remarkable success stories in US economic history. War production not only overcame lingering weaknesses from the Great Depression but transformed the economic system into the modern powerhouse that became the platform for our long-running postwar prosperity. All this was achieved by the government, largely with borrowed money. By war's end Washington had piled up federal debt totaling around 120 percent of annual GDP (nearly double today's debt level).
During the wartime emergency the government took charge of the economy and rapidly shifted the industrial system to armaments while suppressing domestic consumption. Deficit spending force-fed the rapid development of new technologies and new basic industries. In a few short years, economic output expanded by about 75 percent. Despite rationing and wage and price controls, Americans at large were replenished: per capita income rose by almost 70 percent (with industrial jobs opened to women and blacks), and since people could not consume much, the savings rate reached extraordinary levels--23 percent of incomes. The government borrowed these savings and spent them in the national interest. The store of personal savings fueled the pent-up consumer demand driving postwar prosperity.
The United States needs something similar today--a jump-shift in economic strategy that redirects private capital and incomes into public investment for industrial renewal and for greater social protections, while households are allowed to dig out of their debts and restore personal savings. In economic terms, the nation is much weaker today than it was in the 1940s--indebted and dependent on foreign creditors. We will not in any case return to the "happy days" prosperity that followed World War II. But the nation needs another dramatic jolt--a strategy that addresses the depth of our predicament and gets serious about the solutions.
To ensure recovery, the Obama administration may need to launch public employment programs--directly creating jobs when the private economy can't seem to. It can beef up environmental construction and jobs like weatherizing buildings for greater energy efficiency. It can pour bigger bucks into building high-speed rail systems. It can finance smaller firms that are innovating with green technologies and create market demand by purchasing their products.
Far from proposing deep restructuring, Obama and his lieutenants are instead predicting prosperity right around the corner. They are going to be disappointed. As the severity of our condition becomes clearer to people, events may drag the president toward considering more drastic actions. Certainly, public support will build for more fundamental solutions. The usual influential voices will insist there's nothing Americans can do but accept our fate. People and politicians must have the nerve to ignore them.
Let's hope President Obama and the political community brush aside the deficit hysteria and do what they need to do to restore the economy: that is, spend more money--a lot more money--and run up even larger deficits for some years to come. The time to pay down the deficit will come only after the economy recovers. If politicians surrender to the budget scolds, the nation will be stuck in this ditch for a long, long time.