Huffpost Politics
THE BLOG

Featuring fresh takes and real-time analysis from HuffPost's signature lineup of contributors

Allan Brawley Headshot

Deficit Reduction Requires a Healthy Economy

Posted: Updated:

Robert Reich, distinguished economist and Labor Secretary in the Clinton administration (remember the Clinton era's balanced budget and booming economy?) has been promoting a plan to put America back on the road to robust economic growth and low unemployment, while reducing the budget deficit in a rational and timely fashion. In his new book, Beyond Outrage: What Has Gone Wrong With Our Economy and Our Democracy, and How to Fix It, as well as in print and online articles, he warns us that we are in serious danger of falling into the austerity trap that Germany has imposed on the other members of the European Union.

Reich points out that Spain, Greece, and other members of the Eurozone are being held hostage to Germany's obsessive and historically determined fear of runaway inflation. They cannot generate enough economic growth and employment to pull themselves out of their recessionary plight because of the austerity measures they are being forced to adopt. Consequently, they are in danger of defaulting on their loans, face serious internal unrest, and the possibility -- most notably in the case of Greece -- of exit from the Euro Zone. This would seriously destabilize the European economy and send shockwaves throughout the world, including here.

It has become increasingly clear that vulnerable economies with debt problems are placed at serious risk of default or other undesirable outcomes by the imposition of unreasonable and untimely austerity measures. These have the effect of curtailing or even shrinking a country's economy to the point where their debts actually increase relative to the size of their gross domestic product (GDP), thereby exacerbating the problem. Angela Merkel and her allies have recently been nudged modestly away from their hard-line austerity posture but not far enough to ensure that a deep European recession will not occur, with its spillover effects on the rest of us. We need to exert whatever influence we have over there to convince European leaders to promote economic growth ahead of austerity.

In our case, no one is forcing us to follow the dictates of our own homegrown versions of Merkel, although there are plenty of them around, including in Congress, who are as adamant, powerful and potentially obstructive as she is. They are also as wrongheaded as she is. However, now that Barack Obama has been reelected and they need no longer devote themselves to making him a one-term president, there might be some hope that they will put the health of the economy and the welfare of the country as a whole ahead of partisan political advantage.

Reich is not proposing that we fail to address the deficit problem but he believes strongly that we must deal with it in a more rational manner -- one that promotes growth first and then establishes indicators that would guide the process for dealing with the debt. It goes without saying that we cannot allow the impending "fiscal cliff" to go unattended. That would be a recipe for economic turmoil on a global scale and both Democrats and Republicans have much to lose, politically, if they allow that to happen which they probably will not.

Neither side has anything to gain by letting the Bush tax cuts expire on January 1, 2013, along with a huge across-the-board spending cut, including in defense. Aside from the need to protect their own side's particular interests in such a scenario, they are surely well aware of the prediction of the Congressional Budget Office (CBO) that a recession will begin in early 2013, if these measures are allowed to occur. Combined, they represent approximately five percent of GDP, far exceeding projected economic growth. In fact, the CBO estimates that GDP will actually decrease by 2.9 percent next year and unemployment will top 9 percent if Congress and the administration fail to act. And, what effect would these developments have on investors at home and abroad? Think about Greece, Italy, Spain, Portugal and Ireland. Shrinking economies scare investors. Consequently, the president and the Congress will act either before or soon after January 1 to avoid the worst consequences of the fiscal cliff.

So, what is Reich proposing? Since he believes strongly that we cannot effectively deal with our deficit problem unless and until our economy is much healthier, he presents a plan for jump-starting the economy first and then addressing the deficit in a rational and timely fashion. Specifically, drastic deficit reduction should not occur, in his view, until the economy is growing at least three percent per year and unemployment is below six percent. Only when these goals are achieved, would a plan -- specified in advance -- be implemented to phase in the necessary budget cuts and tax increases to reduce our long-term debt.

And what will be required to reach those economic growth and employment benchmarks? The president must shift the debate to one that focuses on the creation of millions of new well-paying jobs restoring our neglected infrastructure, and investing in education, job training, and renewable energy. These initiatives will require additional government spending in the short term but will contribute substantially to achieving the necessary growth in the economy and employment, as well as generating tax revenue.

In addition, he should deliver on his promise to make the tax system fairer by having those who make more than $250,000 per annum pay more while maintaining the Bush tax cuts for those earning less than that. Massive tax breaks for corporations and the wealthy have not delivered the general prosperity promised by the advocates of "trickle down" economics. In reality, they have had the opposite effect -- creating income and wealth inequality, as well as a shrinking middle class and poverty rates, not seen in decades. If we continue down this path, Reich warns us,

the vast middle class -- as well as those aspiring to join it -- won't have the purchasing power to grow the economy and create new jobs.

The president has stated that the economy has to grow from the middle class out and we need to be sure that he has our support in pursuing policies that reflect that commitmnt.