Common Sense on Budgets

Robert Borosage

Amid the blizzard of statistics, trillion dollar deficits, howls about impending bankruptcy, and Republican stupocrisy that surround the budget, it is worth repeating a little common sense.

1. The huge deficits are caused primarily by the economic downturn, and the accompanying collapse in tax revenues (down to 14.7% of GDP) and automatic increase in spending on unemployment, food stamps and the like. The Bush misrule – tax cuts and not paying for two wars, record military budgets and the prescription drug benefit – adds to the problem. The Obama Recovery spending – too small, not too large – adds the smallest amount to the pot.

2. Deficits will be reduced primarily by economic growth. Growth brings the deficit down from 10% of GDP to 5% in the Obama projections. Growth brings the deficit down in the Republican budget also (They cut over trillion from Medicare and Medicaid but that essentially pays for top end and corporate tax cuts).

3. The biggest challenge facing the country is still jobs and growth, not short-term deficits. The Obama budget projects unemployment to be at 9.8% when the domestic discretionary spending freeze kicks in. The jobs supplementals currently under discussion — $150 billion passed by House, $100 billion for Obama, $80 and falling in the Senate –are too small to make a difference. And it isn’t clear where the jobs will come from with consumers cutting back, states and localities cutting back and businesses putting off investments. With the “freeze” and the tea baggers turning political attention to spending cuts, the biggest danger is that spending restraints and the rollback of Federal Reserve subsidies will retard recovery – and increase deficits as mass unemployment continues.

4. The long term deficit challenge is entirely one of health care costs. Assuming the economy starts growing again, the long term deficits are caused by soaring health care costs. Republicans limit these by abolishing Medicare and Medicaid, turning the former into a voucher program that will push more costs onto the retired and the latter into a block grant that will push more costs onto the states (or the poor and disabled). Comprehensive health care reform that gets both private and public costs under control is the only sensible way to deal with this challenge. Period

5. The investment deficit is more serious than the budget deficit. We suffer a staggering deficit in investment in areas vital to our future – in 21st century infrastructure, research and development, new energy, education and training, even sound bridges and safe water systems. If we are to compete as a high wage country in a global economy, we must lead, not lag in these investments. The president’s domestic freeze makes it virtually impossible to make the investments we need.

6. The freeze should be on military spending. Obama is projecting a $700 billion military budget, the highest ever. This level of spending – and the global commitments and two wars it supports – is a threat to our national security. We are starving the investments we need to make at home – particularly in new energy and the green industrial revolution – to sustain troops across the world while fighting two wars. Eisenhower, the former general, put a lid on the military budget – forcing the services to fight one another for funding, and putting pressure on the Pentagon to get a better grip on its waste, fraud and abuse. We should be reducing our empire of bases, and putting a lid on the Pentagon budget for years, moving the savings into areas vital to our future.

7. Some areas of the country are worse off than others. Unemployment averages over 10%, but it is far higher in our urban areas, catastrophic among young male minorities. Targeted public service jobs and training programs are vital if we are not to witness a continuing collapse of urban society.

8. Some jobs programs are better than others. Public works – putting people to work doing work that needs to be done –is perhaps the most efficient. The current favorite of the administration – the jobs tax credit –is one of the worst. Virtually all of the money goes to subsidize employment that would take place anyway. The rest is probably gamed by dishonest employers. So this is like giving grants to business owners. It probably has some stimulative effect, but not much.

9. We spend too little, not too much. Federal spending has been averaging about 19-20% of GDP. The economic collapse has increased it to 25%. Obama’s budget will bring it back down to 22% and boasts that domestic discretionary spending to the lowest level of GDP since World War II. This is stupid, given our investment deficits. We’d be wise to sustain spending at about 24-25% of GDP, make the investments we need to create world class infrastructure, schools, affordable college, cutting edge Rand D, and a healthy start for all kids. And pay for it over the long run

10. We pay too little in taxes, not too much. Yeah, I know this is lethal politically, but it is true. We’ve been raising about 18% of GDP in taxes, an inadequate amount for a modern industrial nation. Our corporations pay a lower effective tax rate than the average of industrial countries. Our wealthy pay a lower rate than their secretaries. We subsidize the hoarding of great fortunes, rather than distributing the benefits of growth equitably, thus generating rising tax revenues from workers. On every social indicator – health, longevity, education, social cohesion, crime, generosity – more equitable societies fare better than richer, less equitable ones like our own.

These things aren’t political. They aren’t spun into message. They aren’t conventional wisdom. They are just common sense.

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