Chris Wallace and the Austerity Tax

Dean Baker on 2016 July Jobs ReportAt the debate last night, moderator Chris Wallace challenged both candidates on the question of cutting Social Security and Medicare. The implication is that the country is threatened by the prospect of out of control government deficits. The question was misguided on several grounds…

The country’s problem since the crash in 2008 has been deficits that are too small, not too large. The main factor holding back the economy has been a lack of demand, not a lack of supply. Deficits create more demand, either directly through government spending or indirectly through increased consumption. If we had larger deficits in recent years we would have seen more GDP, more jobs, and, due to a tighter labor market, higher wages.

The problem of too small deficits is not just a short-term issue. A smaller economy means less investment in new plant and equipment and research. This reduces the economy’s capacity in the future. In the same vein, high rates of unemployment cause people to permanently drop out of the labor force, reducing our future labor supply if these people become unemployable…

The Congressional Budget Office now puts potential GDP at about 10 percent lower for 2016 than its projection from 2008, before the recession. Much of this drop is due to the decision to run smaller deficits and prevent the economy from reaching its potential level of output. We can think of this loss of potential output as an “austerity tax.” It currently is at close to $2 trillion a year or more than $6,000 for every person in the country.

It is unfortunate that Wallace chose to devote valuable debate time to a non-problem while ignoring the huge problem of needless unemployment and lost output due to government deficits that are too small.

—Dean Baker
Chris Wallace, Supply, Demand, and the Government Budget Deficit

11 thoughts on “Chris Wallace and the Austerity Tax

    • Matt Yglesias used to say, “If you want to pull poor people out of poverty, give them money.” That’s the problem with conservative and neoliberal policy: it insists upon doing everything indirectly. Most Very Serious People love the earned income tax credit. But it turns out that about 40% of the money ends up going the employers of the poor by keeping wages lower.

      • Because they don’t think that the poor make good decisions. Otherwise why would they be poor?

        Short sighted thinking that doesn’t involve anything more than bogus assumptions.

        • Yeah. That’s the problem with the power elite: they are as much in an echo chamber as the Fox News crowd. That’s how we get a lot of bad policy based not on evidence but on “common sense” that just happens to be wrong (but somehow always results in benefiting the rich).

  1. Although a radical friend of mine just said to cancel all credit card debt which is simply a bunch of digits on a screen anyway. The lack of having to pay anything towards it frees up money for other things and is equally stimulative.

    • And credit card bills go straight to ginormous banks which are doing almost nothing productive for the economy. Buying diapers at a locally-owned supermarket is far more useful in terms of promoting fiscal growth.

  2. I agree that deficits are too low to provide adequate stimulus. On the other hand, after decades of deficits, the accumulated debts are so large that the slightest increase in interest rates is crippling.

    Fiscal policy was a wasting resource, and has been expended. We’ll have to come up with something else from here on out.

    • It depends upon what you mean by the slightest increase in interest rates. Our interest burden is lower than it has been in decades. Interest rates would have to go up substantially. And that would almost certainly go along with a booming economy. There’s no reason to expect stagflation.

      I don’t see how you can say that fiscal policy won’t work in the future. Did you mean to say monetary policy?

      • Estimates of the Federal debt vary, but most of them are just under $20 trillion. Add in corporate and consumer debt ($29 and $12 trillion, respectively), and the total is currently about $60 trillion. So a quarter-percent hike in interest rates would increase interest costs by about $150 billion, spread through most sectors of the economy. Some of it would stay in the U.S., but much of it wouldn’t.

        So yes, monetary policy has become far too blunt an instrument because the amount of debt in the economy magnifies its impact too much.

        But fiscal and monetary policies aren’t separate in the long run (unless deficits and surpluses net to zero over time, which they don’t). As Bill Clinton learned, budgets are constrained by the need to avoid riling the bond market, thereby raising interest rates and choking the economy. This constraint has become more severe since his day, because the amount of debt has increased.

        • Except that they haven’t been for almost a decade. We have seen and will continue to see excess capital running around looking for investment opportunities. And a 0.25 percentage point increase on 1% net interest rate would be a 25% increase in the debt burden; $150 billion is less than 1% of GDP — not nothing but not catastrophic either. I’m not clear what you point is.

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