What causes deficits?
April 14, 2011 —
“Annual income twenty pounds, annual expenditure nineteen pounds nineteen and six, result happiness. Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.” With these words, Charles Dickens’ irrepressible but perennially indigent Mr. Micawber sets out a crucial principle that apparently escapes the current-day deficit-hawks in Washington: that debt arises not from one thing, but from a relationship between two things—income and spending. A loss of income can produce a deficit just as readily as an excess of spending. And the very act of cutting spending can trigger a loss of government income by putting the brakes on economic activity, the underpinning for all income in the country, public as well as private.
As long as the American economy continues sluggish, the deficit problem will never be solved. And while it is sluggish, every cut in government spending—like last week’s orgy of budget-slashing, which Republicans and President Obama alike toast as “the largest in history,” will only result in a further loss of income, used as an excuse for further cuts in spending, in an unending, impoverishing vicious cycle.
History teaches us that government can spend the money needed to create and maintain our common infrastructure, educate our workforce, protect our environment, encourage technological innovation and take care of the vulnerable among us—“expenditures” most of which are in fact also investments, necessary for future income generation—without crippling the economy. The $290.4 billion deficit inherited by Bill Clinton, for instance, was turned into a surplus of $236.4 billion, due largely to a booming economy: higher private income means more tax income. But some of it was due to the fact that government raised some tax rates, largely on upper-income households—proving that you can raise taxes without harming the economy, if you do it in the right place.
History also teaches us that cutting government spending when the economy is weak can actually create recessions and reduce government income. That’s what happened to Franklin Roosevelt in 1937 when, after several years of successful New Deal programs helped reverse the economic decline of the Great Depression, he was persuaded by the deficit hawks of his day he had to cut spending. Back down the economy went.