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Posted by on Nov 14, 2012 in Budget Showdown, Debt, Economics: The Current Buzz | 0 comments

The Truth about the Deficit and our National Debt

The Truth about the Deficit and our National Debt

by Maria R. Fitzsimmons

I’ve got a couple secrets to share with you about economic policy in the United States today. They all revolve around one simple truth: the deficit is not an imminent “cliff,” as it may seem in the media. In fact, it is not really too much of a concern.

The deficit and the fiscal cliff are not the same

Deficit means that there is more expenditure than revenue, or less revenue than expenditure. The deficit is a yearly measure of what we as a country are spending more than is in our accounts or taking in less than we need to fund the necessary social programs that serve so many Americans. The sum of each year’s deficit equals the total national debt, now over sixteen trillion dollars.

The fiscal cliff refers to a deadline our congressional representatives created to force themselves to take action on the deficit. Because their leadership has been an utter failure, both in identifying the actual problems to what ails this country (read: not the deficit) and in then creating solutions to those problems, they wrote the Budget Control Act of 2011 that created the two elements of the fiscal cliff: sequestration, or automatic cuts in government programs, and automatic tax increases through the expiration of the Bush Tax Cuts and other sources.

Secret one: In fact, there is no “fiscal cliff”

Do you remember the first rumblings of the ‘fiscal cliff’? It started in 2010, but was not well covered in the news then. In August 2011, you may remember, was the first very public fiscal debacle, known then as the ‘debt ceiling’. The debt ceiling is the legal limit on borrowing to fund government programs imposed by congress on the government as a whole. Prior to 2011 Congress had frequently raised the debt ceiling with very little publicity. You may remember that the debt ceiling resulted in a game of chicken with congress ultimately increasing the debt ceiling. The deal they made then lasted until 2013. It cut over two trillion dollars over 10 years in exchange for an increase in the debt ceiling and created a bipartisan super committee to continue the plans for spending cuts.  The super committee negotiations eventually broke down in November 2011 for the same reason we are in this situation today – there is no agreement on spending for social programs and tax increases.

So, it is important to note that this is really not how economics works. Despite what congress may like us to think, the economy does not boom and bust on cue. To be sure, there are cycles of boom and bust, but we cannot write them into law and hold the American people hostage to them.  Like climate change, the situation we call today the “fiscal cliff” is human made. Congress created this situation and Congress can put an end to it. In fact, a more accurate description is not that of a cliff but that of a ditch, dug by our congressional representatives when they passed the above mentioned Budget Control Act because of their failure to create a real plan for America. The fiscal cliff is a manifestation of the distraction that concern for the deficit has become.

Secret two: we are worrying about the wrong things

So here is the second secret of our economy: we do not need to worry about the deficit right now. We do need to worry about the fiscal cliff but not because our economy will blow up if we do not take action. We need to worry about the fiscal cliff because it is a self-fulfilling prophesy that will run roughshod over the American people.

There are no hard and fast rules about when we need to worry about the amount of national debt. We may want them, but there is simply too much variability to make that call in all cases. However, we can be certain what a thriving economy looks like, and we have many tools to create that economy, including investing in the American people through spending, like an infrastructure and green energy plan. Furthermore, there are a number of factors that afford the United States greater leeway as we make our way through this problem together, such as our political stability, the size of our economy, and our history as a political and economic leader.

Newsflash: A household economy and a national economy are wildly different

“But we are spending more than we have, isn’t that bad?”, I hear you say.  No, actually it is not. In economics there are two general fields: macroeconomic theory and microeconomic theory. This is important because it is the key to why national deficits and the national debt are not a serious concern. If we relate the national deficit to your personal finances then yes, it would be a real concern if you of I were spending well over one hundred percent of your income for 200 years. But a nation’s debt and an individual’s debt are not comparable for a number of reasons including the size of the economy, the requirement of debt for growth, stability, and the timeline of that economy (an individual’s debt has an expiration date, ostensibly America’s does not). Individual debt and national debt are very different things and we need to stop pretending like the comparison is helpful.

If it is that important to you, know that we can solve the problem of our growing deficit – but we should not try to do it on a short timeline.

Austerity, or the fiscal policy aimed at lowering deficit through cutting spending on social programs, is the short term solution to a deficit/debt problem that is most often considered. The only thing that we need to know about austerity is that the International Monetary Fund, historically speaking the world’s number one proponent of austerity, has said recently that austerity without growth is toxic. Growth should be the number one concern, not the deficit, and certainly not austerity. A progressive tax policy that requires the wealthiest Americans to pay their fair share and that taxes financial transactions can actually help us limit the deficit, and has a much greater chance of leading to growth than austerity. However, there are no short term solutions to the national debt. Limiting yearly deficit via austerity will lead to more suffering, not to a viable dent in the national debt. It will not work. Stop thinking about it.

So, what now?

We, you and I, and our communities, are more than simple economic actors, and we know this deficit scare analysis is wrong for another reason. The question is simple, do we serve the economy or does the economy serve us? The very idea that we need to solve the deficit or national debt first, which is embodied in the idea of a fiscal cliff, reflects the assumption that we are somehow beholden to some secret force in the economy, as if the goal of Adam Smith’s invisible hand is actually to backhand low and middle income, and working Americans. Putting concern for the deficit before social programs and New Deal style job creation is not only reflective of poor economic theory, it pits the American people against the economy, as if a thriving economy and an impoverished, sick, jobless, homeless, uneducated populace is some how admirable, let alone even possible.

We are being held hostage by an entirely fictional game of chicken. Does that make you feel silly? It should. Does that make you feel angry? It better. It is time for action. We need to demand accountability and action on the part of our elected leaders to actually lead our country by protecting social programs, creating progressive revenue sources, and investing in America for growth.

Maria R. Fitzsimmons is the education organizer with Southsiders Organized for Unity and Liberation (SOUL). She has a bachelor’s degree in International Political Economics from Fordham University in Bronx, NY.

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