The deficit scolds are getting what they wanted: Today the Congressional Budget Office announced that the federal deficit for this fiscal year is the lowest it has been for any year in the Obama presidency – $486 billion, or 2.8 percent of the nation's gross domestic product.
The rest of us, though, aren't getting what we were promised. Conservatives have repeatedly told us that cutting federal spending, and reducing deficits, would unleash economic growth and create jobs. Instead, what we have to show for it is a languid economy at best, with only enough jobs for half the people who are unemployed and looking for work.
Economic growth is weak enough that the Federal Reserve, at its September meeting, agreed that it was not ready to signal that an interest rate increase would come soon, for fear of further hindering economic growth. "[I]t would be prudent to err on the side of patience while awaiting further evidence of sustained progress toward the Committee's goals," the Federal Open Market Committee said in its September meeting minutes. It added that "the costs of downside shocks to the economy would be larger than those of upside shocks" because it would be easier for the Fed to withdraw future stimulative efforts than to add them.
The evidence keeps piling up that the bipartisan consensus that we needed to focus on deficit reduction instead of full employment was disastrously wrong. Following that consensus has worked for Wall Street and the 1 percent – with the only stimulus to the economy being the Fed's asset-buying program – "quantitative easing" – and near-zero interest rates, equity prices have risen to record levels. The Dow Jones Industrial Average, which before the 2008 crash peaked at 14,164, today closed at 16,994, an almost 20 percent increase. That's good if you own stocks, but if you're a working-class American, what really counts is that your wages have been flat. In fact, when you account for the disappearance of high-wage jobs and the proliferation of low-wage ones, workers have seen an average decline in wages of 23 percent. Plus, with corporations focusing on boosting their stock price instead of rewarding their workers for their productivity with improved wages and benefits, there has not been the level of consumer spending that encourages a virtuous cycle of more hiring to keep up with consumer demand.
The shame is that we could have gotten the same news of a lower deficit from the CBO through a much better route. Nick Bunker at the Washington Center for Equitable Growth cites economists Paul Krugman and Brad DeLong, and former Treasury Secretary Lawrence Summers, as three of the powerful voices saying that the United States should have taken advantage of low interest rates and low inflation to spend heavily on infrastructure – and create jobs.
Summers and DeLong, Bunker writes, argue that "all expansionary fiscal policy can be self-financing—not only infrastructure spending but also other forms of government spending and transfers. ... [C]urrent fiscal policy that quickly puts the economy back toward its long-run potential will be paid for by the future output it created."
In other words, spending to put people to work on projects that support the future growth of the economy more than pay for themselves in the long run – including by tangibly lowering the federal deficit through growth. On the other hand, high unemployment is an economic cost, and slashing the budget in a mindless pursuit of low deficits does not erase those costs.
The news of a low deficit may have quieted the deficit scolds, but their flawed ideology has not gone away. Far from it. That's why it's important that we get the story straight, and tell it straight to people who will be voting in November.