Cognitive Dissonance on the Deficit?

06/30/2011 04:08 pm ET | Updated Aug 30, 2011

The continuing debate over deficit reduction underscores an apparent contradiction between cutting the deficit and increasing economic growth at the same time. Obviously, increasing economic growth would make deficit reduction easier, but it is difficult to see how we can accomplish that at the same time we are making major cuts in spending. There does seem to be some cognitive dissonance at work here.

Let's sort it out. In the first place, no one has a clear idea how to get the economy growing strongly again. Fed Chairman Ben Bernanke said as much last week. QE2 was his last shot. He has no arrows left in his quiver. Neither does Congress or the White House. They have pumped billions into the economy and probably mitigated the downturn somewhat, but we are left with anemic growth that is not reducing unemployment. The conventional Keynesian measures have not been particularly effective.

As for reducing the deficit, the Congressional Budget Office says it would take savings of $7 trillion over the next 10 years to hold the federal debt at its current level of 69 percent of GDP. To actually start paying down the debt would require even more savings. Clearly, you cannot take $7 trillion out of the economy without compromising growth.

We are indeed in dire straits, not because we lack sufficient wealth to deal with our problem, and not even because we lack the political will to make tough decisions, but because we lack the intellectual rigor to recognize the reality of this financial recession. The reality is that we are awash in a tsunami of debt and will need several years to work our way through it. The best we can do in the near term is accept that reality, and chart a path to fiscal solvency based on principles that put a priority on growth. Every tax and spending decision should be based on growth and jobs.

There is a consensus that we need to reduce the deficit, and that most of that must come by reducing spending which is the main problem. Ten years ago, Uncle Sam was spending 19 percent of GDP; today it's 25 percent and rising. But it makes a big difference how we cut spending. Some cuts - farm subsidies, defense, entitlements - should take precedence because they entail minimal impact on economic growth. The biggest savings can be achieved from entitlement reform and requiring all federal agencies to use zero-based budgeting.

On the revenue side, we can make progress on reducing the deficit while encouraging growth. We can gain revenue by eliminating special provisions, such as the ethanol subsidy, without raising tax rates. At the same time, we should increase the payroll tax cut because that would reduce the cost of labor and increase jobs. A tax increase on upper income individuals is not likely to have a significant impact on growth.

Our long term plan should be directed, not at spurring more growth this year or next, but for the long term to make us more competitive - more R&D, worker training, investment in infrastructure, promotion of exports, and deregulation. The American people will buy into a long term plan if it is laid out plainly and puts the emphasis on growth and job creation.

Jerry Jasinowski, served as President of the National Association of Manufacturers for 14 years and later The Manufacturing Institute. Jerry is available for speaking engagements. (June 2011)