When the national debt matters and when it doesn’t

10Mar13
Boehner Discusses GOP Jobs Plans

Boehner Discusses GOP Jobs Plans (Photo credit: Talk Radio News Service)

Since the deficit has become such a huge political issue, politicians on all sides feel they must address it. Okay, fine. Let’s address it. First of all, what Congressional Republicans want is austerity. Both Greece and the U.K. have put on fantastic demonstrations of why austerity doesn’t work. In the last quarter of 2010, after George Osborne managed to get his spending cuts through Parliament, the U.K.’s economy began to shrink, throwing them back into recession while we continued to try and struggle out.

Their economy is growing again—slightly—but not as much as ours is, and ours is still relatively slow.

Basic economics generally dictates higher spending during times of economic slow-down and lower spending during times of strong economic growth. Yet the GOP would have us believe that the deficit stifles investment, which kills the economy. Well, the sequester’s here now. We’ll see just how much investment increases, and how well it spurs the job market, though it would not be a surprise in the least to hear the GOP say that the sequester cuts were all the wrong cuts, which is why they didn’t work to stimulate investing and therefore the economy.

Here’s the naked truth of the deficit and the national debt: The amount of a nation’s debt primarily matters as a percentage of its gross domestic product. A $16.5 trillion debt looks a hell of a lot less serious if it’s 40% of GDP than it does if it’s 80% of GDP. Cutting spending, particularly to the degree that the GOP would be satisfied with (Boehner Rule, anyone?), now can significantly slow the economy back down, possibly throwing us into another recession, as it did in the U.K.

Another recession can shrink our economy, which, of course, means our GDP will shrink, which will make our deficit a bigger chunk of it, even if the number of dollars in the deficit comes down. If the annual deficit is a bigger percentage of our GDP, chances are that the overall national debt will become a bigger percentage of our GDP.

The best and safest path to deficit reduction is not in focusing on its dollar amount, but rather on its percentage of our GDP. Which means finding ways to get the economy roaring again. Taxes (either cuts or increases) and spending cuts can play a part in growing the economy, and should, but only if they’re introduced little by little, which House Republicans don’t seem to want to do. They want all their spending cuts now, and they’ll only accept closing tax loopholes if the extra money brought in goes towards, you guessed it, paying for lower tax rates.

An interesting little factoid: the private sector added over 230,000 jobs in the month of February, in spite of the expiration of certain tax cuts and the looming sequester, and unemployment fell to 7.7%, which is the first time unemployment has fallen since September 2012. A big part of those gains were in construction, due to the recovering housing market, but overall were spread across all industries.

President Obama has already signed $2.5 trillion in spending cuts. His last offer to House Speaker Boehner, which contains a lot of cuts that are not as unpalatable as those imposed by the sequester, is still on the table, but because it contains tax revenue that’s not to be used to pay for lower tax rates, Boehner won’t even consider it.

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16 Responses to “When the national debt matters and when it doesn’t”

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  9. 13 tom mcbride

    Keynes would not have agreed with the deficit spending occurring today. He wrote when deficits in the U.S. were virtually “nonexistent”. We could easily during the Depression increase our debt. When you wrote this article the debt was what 40% GDP? Well now it is 70% and climbing espectially after a few years. The CBU says our debt is becoming unsustainable. Spending to boost the economy is good in slow times but only if it used for needed infrastructure improvement. Not when it is (and was) used to support government unions to avoid layoffs which it was. Don’t you remember Obama joking (how tasteless) “Well I guess there weren’t so many shovel ready projects, HA HA). Also the Dems want to keep those union dues coming in. “Austerity” isn’t a program. It is what a country is FORCED to do when it has no more money and can no longer borrow more. The violence in Greece is what happens when the government can NO LONGER pay for programs necessary and unnecessary. This is what happens when governments persist in profligate spending. Those who suffer most (everybody suffers) are the poor, aged etc. who loss the benefits they need. We get away with it because we are the worlds de facto currency but that may be changing. If there is some disruption in the status quo or some unforeseen emergency occurs or just if we continue in our current ways there will be a financial collapse at some point (no one can say for sure or when).
    Obama’s “spending cuts” are promises for the future eg. so what’s new for the politicians? 7.7% unemployment #1 because few people are looking for jobs eg. they have given up #2 many or most of the new jobs are part time. Housing sector and other industry improvements? Nothing to due with anyone. Don’t you realize that at some point people MUST have new housing and that worn out cars, appliances, clothing etc. MUST be replaced? This kind of thing happens naturally by necessity but is growth.


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