Deficit Recovery

The party that was operated on the dictum that "deficits don't matter" now is very much in a lather about our national debt. Let's look at the history.

At the end of the Clinton admin, the budget had a surplus.  We were taking in more that we were spending.  We still had an outstanding debt but it wasn't getting any worse.  Then the dot.com bubble burst.  In an effort to stimulate the economy, Bush lowered taxes.  There was little appreciable stimulus but the deficit began to grow. In addition, we started paying for two wars.  This increased the deficit even more. 

Then the economy tanked.  In 2010 we had the lowest revenue as % GDP since 1950.

We should be asking, "What is the appropriate target revenue per GDP that government should have?"  This benchmark should be low enough that there is space to temporarily increase it in case of emergencies.  But there is no need to make it so low that government is crippled.  From 1983 to 1999, the federal revenue per GDP range from 16.94% to 19.38%o averaging 17.61%.  During that time, the GDP growth ranged from 3.3 % to 11.21%, averaging 6.28%.  In 2011, revenue per GDP was at 13.24%.  If we are serious about reducing the deficit we need to get our revenue back up to the something near 17%.  That means simply more tax revenue.  Really getting ahead on the deficit requires that we also fix our depressed economy.

On the revenue front, the first hit to the budget was the Bush tax cuts.  They should be the first to go in the process of getting our house in order.  The next target should be a belated tax increase to pay for the recent war efforts.  That should buy us some necessary breathing room in which to strategically restructure government to ensure better economic growth.

Supply-siders hold that more money in the hands of investors allows them to make investments that increase jobs and economic growth.  There has yet to be a convincing demonstration of this theory.  Demand-siders hold that more money in the hands of lower income consumers generate consumer spending that generates demand that then generates economic growth.  They also hold that strategic government investment can stimulate growth by provide economic infrastructure that opens new economic doors.  This has, in fact, been demonstrated in our history.  Major government investments in power production, irrigation projects, education, and transportation links have indeed fueled growth.  So my allegiance is with the demand-siders.

Another thing to look at is the source of our economic problems.  The biggest key factor is the collapse of the housing bubble.  A lot of wealth has just evaporated.  Consumers who were using inflated equity to buy goods and services now find themselves owing much more for their house that it will ever be worth again in their lifetime.  We need to reform the financial system to prevent a repeat of this.  Another cycle like this would be an apocalyptic disaster.  Reform would cost little but would end the worry about a repeat.

We need to rev up the economic engine.  Money to buy home-grown goods and services needs to flow into our markets.  This is where we need to be creative.  It may take government spending to do this, but we don't want to create an unsustainable situation.  This means that we have to be smart about benchmarking the success or otherwise of the stimulus spending.  We don't have money to gamble with.  Every program needs to have a method of scoring its success.