When the national debt matters and when it doesn’t

10Mar13

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.

Related articles

• Deficit Is Falling Dramatically, But Only 6% Know That (ourfuture.org)

Filed under: Economy, Opinion, Politics   |  16 Comments
Tags: austerity, Barack Obama, budget, budget deficit, deficit spending, Economic growth, GDP, GOP, government spending, Gross domestic product, national debt, sequester, spending cuts, tax cuts, tax increases, taxes, United States