Which deficit cure: austerity or prosperity?

A recession is no time for deficit hawks’ fiscal alarmism. The road to recovery will require more federal spending in the short term, not less. Deficit reduction will follow.

Robert Kuttner
LA Times
April 27, 2010

Get ready for the dance of the deficit hawks.

The way they see it, the economy is headed for dangerous and uncharted fiscal territory because of rising deficits and debts, and therefore, we need extraordinary measures.

Tuesday is the opening meeting of President Obama's National Commission on Fiscal Responsibility and Reform. And Wednesday, the billion-dollar Peter G. Peterson Foundation convenes its National Fiscal Summit, featuring prominent budgetary conservatives from both political parties, including key administration officials. Both groups are likely to come to the same conclusion: If Congress fails to hit a specific deficit target, then a cap on federal spending should kick in. Budget hawks tend to blame outlays such as Social Security and Medicare, and they are eager to put a lid on them.

But there's a problem with all this fiscal alarmism. It confuses three entirely separate concerns: the current large deficits, which are caused by the deep recession; the long-term health of Social Security; and the inexorably rising costs of Medicare and of healthcare generally. If you unpack these issues, a different picture and set of choices emerges.

The current deficits — about 9% of gross domestic product — are mainly the consequence of the financial collapse and the resulting decline in tax revenues. As those deficits pile up, the national debt increases.

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