Deficit spending harms U.S. prosperity

By Gregory

Will someone please send the editorial writers at the Daily to a remedial economics class? The editorial “Balanced budget may hamper, not help U.S.,” published in the July 22 edition of the Daily, was so littered with misnomers and misrepresentations that I mistakenly thought I was reading the National Enquirer.
With a patronizing tone, the editorial states, “Voters must understand what retracting the government’s ability to act as a stabilizing force in the economy will mean for long-term growth and security.”
Really? As an uninformed and undereducated voter, I’m befuddled when it comes to explaining how deficit spending promotes “long-term growth and security.”
Will crippling interest payments insure that we Generation Xers enjoy a higher standard of living than our baby boomer parents? (Last year’s interest payments on the national debt exceeded the deficit itself.) Perhaps spiraling entitlement spending will provide the solid investment base for tomorrow’s citizens. Entitlements like Medicare and Social Security now account for more than 50 percent of the federal budget; worse yet, programs like Medicare are growing at three times the rate of inflation.
Maybe the editorial writer assumes the defense buildup of the 1980s guarantees American hegemony in the coming decades. Indeed, despite the demise of the Soviet Union and the dissolution of the Warsaw Pact, Pentagon planners, the White House and the Senate Armed Services Committee still mistakenly think we’re in the midst of the Cold War. For example, in Clinton’s budget proposal, military spending tops out at a whopping $254 billion, and the legislators on Capitol Hill want even more.
Like Prozac, structural deficits are being over-prescribed by planners of late as a remedy to the nation’s woes. Long-term economic growth is powered by investments in education, training, infrastructure and research and development. Growth is not driven merely by deficit spending.
The Daily proudly maintains that productivity “continued to increase every year since the end of the oil crisis, despite the deficit and the $4 trillion national debt.” This is true enough; the economy posted a record seven straight years of growth during Reagan’s reign. However, this era was preceded and followed by recessions, and the ’80s posted the lowest rate of growth of any decade since World War II. From 1970 until today, productivity — the real production of goods and services per hour worked — increased at about 1 percent per year. In the 20 years prior to that, the annual rate was about 2.5 percent.
The economy grew not because of fundamental long-term investment, but because of short-term economic stimulus (primarily because of tax cuts and military spending, and partially attributable to declining oil prices). In a recent article in the Washington Post, the Congressional Budget Office predicted that annual deficits will “push federal debts to unsustainable — indeed, unthinkable — levels.” The office continued, “Foreign investors might suddenly stop investing in the U.S. securities, causing … interest rates to shoot up, and the economy to tumble into a severe recession. … The stock market might collapse and consumers, fearing economic catastrophe, might suddenly reduce their spending. Moreover, severe economic problems in this country could spill over to the rest of the world.”
This Great Depression sequel may be melodramatic, but the underlying message is correct — long-term economic prosperity is hindered, not helped, by excessive borrowing. Be careful, the CBO sternly warns, or the budget bubble will burst.
Zero deficits translate into lower interest rates, and that benefits everyone from Wall- Street investors to main-street home buyers. A looser money supply promotes capital investment in machinery, factories and warehouses, which in turn leads to jobs and growth.
Additionally, the deficit drags down the national savings rate, which further limits investment opportunities. Americans save an anemic 4 percent of their income, while Germans put away more than 12 percent. If big government will stop charging away our future on its Visa Gold card, more money will be available for private investment in plants and equipment, education, job training, and research and development; this is the type of spending that produces real economic growth.
In another troubling sentence, the Daily claims, “Unbending policies aimed at eliminating deficit spending could actually undermine corporate growth and increase the expanding gap between the middle-class and working poor.” A quick review of the decadent 1980s proves otherwise. Unfortunately, while we witnessed extreme corporate greed, the gap between the “haves” and the “have-nots” expanded substantially.
The government embraced deficit spending way back when Elvis was just starting to shake his hips. The last year the U.S. Department of the Treasury took in more than it spent was 1969. With all of this deficit spending, the distribution of income became steadily more skewed, not less. In 1994, the latest year statistics were available, the Census Bureau reported that the upper fifth of Americans accounted for nearly 50 percent of the country’s annual income while the lowest fifth claimed slightly more than 5 percent. It hardly seems like the borrow-and-borrow mantra protects the poor.
Finally, financing the national debt doesn’t help low-income folks. Generally speaking, government bonds are not distributed evenly across demographic strata. Upper-income types receive a disproportionately large share of interest income from these bonds, and deficits therefore tend to exacerbate the distribution of wealth.
Yes, deficit spending is perhaps the government’s most effective tool in regulating economic growth. If used judiciously, deficits and surpluses serve to moderate the troughs and peaks of the business cycle. It is not, however, a panacea for our financial worries. Beginning in the 1980s, deficit spending was more indicative of a weakening political spine than prudent economic thinking. The current sentiment in Congress to reduce the deficit and balance the budget should be applauded, and the Daily would do well to reconsider its position.
Gregory Lauer is a seniormajoring in civil engineering.