The Trillion Dollar Scare Tactic

Today, the Washington Post casually warns that "the annual federal budget deficit already is spiraling toward $1 trillion -- about 7 percent of the gross domestic product -- a level not seen since the end of World War II," to raise concern about the size of any proposed stimulus package in the next Congress. That prompted economist Dean Baker to ask on the Beat The Press blog, "Where Does the Post Get Its Deficit Numbers?"

It's not clear where this trillion dollar figure came from. It is much higher than the most recent CBO estimate, which is $438 billion. The Post may be including the money for the bank bailout, however this would be misleading. The government is getting assets for this money and will at most lose a fraction of the $700 billion appropriated.

I suspect the Washington Post is keying off of yesterday's Boston Globe article, "Federal deficit could top $1 trillion." But that piece too strikes me as having a dubious basis.

The Boston Globe cryptically sources the figure to "estimates provided to the Globe" by unnamed members of the "Senate Budget Committee and independent analysts."

And the only senator on the Senate Budget Committee quoted backing up that estimate is not anyone from the Senate majority, but the minority ranking member Sen. Judd Gregg, who opposed the previous, smaller stimulus package and would likely oppose any additional one.

So the estimate does not appear to be any sort of official conclusion by the committee as a whole.

Gregg based his concerns in part on the weakening economy:

Gregg said the problem is being compounded by an enormous drop in government tax revenues, which in recent years had been growing as investors cashed in stock market profits. With few people making money in stocks this year, tax revenues will fall sharply, probably by at least $100 billion.

"The economy is a dropping like a rock and the federal government will feel that very quickly on the revenue side," Gregg said in an interview. "I think it is very hard in the context of a trillion-dollar deficit to add new programs to the books."

Yet, as the Globe noted -- in a brief, downplayed aside -- smart public investment can help grow the economy and address that specific problem:

Economists said the goal of the stimulus program would be to create enough growth to eventually offset the cost of the program and, in the long term, reduce the deficit. They said that if the stimulus plan does spur substantial growth, that would help the banks that have borrowed money from the government under the financial bailout plan to repay the loans with interest. That, in turn, would help shrink the deficit if other economic problems are brought under control, the economists said.

Baker makes the point as well:

The [Washington Post] article also asserts that this spending may make it more difficult for the government to pay for Medicare and other programs in future years. This is not clear. If the stimulus boosts the economy it will lead to more tax revenue in future years. More importantly if it makes the economy stronger and prevents a prolonged downturn, it will make it much easier to raise the revenue for Medicare and other obligations in future years.

That's the actual debate.

Not whether additional spending will grow the deficit by its sheer size alone. But whether the items that make up a stimulus package will amount to potent investment that will both expand the tax base and produce cost savings, or wasteful spending that will do little for the economy and leave the budget in tatters.

Flashing a trillion dollar deficit bugaboo is a meaningless scare tactic. Let's have a real debate on the merits of the specific public investments proposed.

Originally posted at OurFuture.org

Comments

[DailyElitist]

Notice how concern about the deficit only crops up when we're talking about healthcare, energy policy, infrastructure spending, and other public investments - you know, the type of spending that actually PROVIDES THE AMERICAN PEOPLE WITH A RETURN ON THEIR TAX DOLLARS. Yes, there's plenty of money to bail out the banks, but never money for healthcare. It's OK to throw trillions down the toilet of Iraq, but since we've already squandered all the money in the treasury occupying a foreign country and subsidizing the wealthy, we can't afford policies to make college affordable. I've just about had it with this crap. Maybe it's time the rich tighten their belts for a change? The working class is out of notches on theirs. I know flying to Europe first class instead of on a private jet is tough, but something tells me they'll make it through.

[Pdubya]

although it goes against many of my principles, i would support an expenditure on stimulus and infrastructre if, and ONLY IF: spending was cut elsewhere that was larger in amount than the stimulus and that amount was applied to the deficit.

otherwise, hyperinflation and the destruction of our currency is assured.

[oldgeek1]

A trillion dollars here and a trillion dollars there, soon you are talking about real money.

[marijam]

What's one more trillion when we're already in for three? Do something for the people, for a change.

[Jaybird248]

To stimulate the economy,.help free up credit, and save Detroit, we need a government facility to issue car loans for U.S. brand cars only. Faced with American car or no car, buyers who couldn't get a regular loan would certainly opt for one of the really nice models now out there ... just as nice as the imports.

Call it Patriot Credit or Ameri-Credit, but it would work.

Sure, there would be some defaults, but right now, billions are disappearing down a black hole in the banking establishment. This is a better solution in that it benefits labor, industry and consumers.

[Pdubya]

more credit?

credit can only come from savings and production.

see my other post.

[Peter007]

I have a comment on the economic stimulus plan, Why not hire more people to build more cars in Detroit ? Car production could double in a few months. The factories are already there. Why not have a government homebuilding company start building more houses.? It will put construction people back to work. Also, why not hire 50,000 new regulators to regulate Wall street. Move them to Manhattan so they will help pay New York cities taxes and keep city services moving. As far as roads go, there are places like Southern California that need more roads. I was there last year and the roads were so full that there wasn't enough place to put the cars . Look on a map. Idaho is lacking roads too. There are hardly any roads in Idaho. They need more. Also the new school in our town is almost 20 years old. We could do with a new building because or kids test scores have gone down this year.