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Deficit "Cutters" vs. "Postponers" -- a False Choice

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There is 'false choice' debate underway within Congress and the administration between "cutters" of the federal deficit and the "postponers", and it played out in spades in last week's unemployment benefits extension debate in Congress.

Even with the U.S. indisputably mired in a prolonged jobless recovery, only two Republicans in the Senate had the sensitivity to vote with 56 Democrats and two Independents to extend unemployment benefits, despite weeks of delay and, in the interim, myriad hardships being dumped on millions of long-term unemployed Americans. The other 39 Republican Senators (and the always-impossible-to-understand 'Democratic' Senator from Nebraska, Ben Nelson) ran from this moral imperative because, according to their Leader, they were "determined to prevent its costs from being piled onto the mounting federal debt".

Of course, on the very same day that these Senators were rejecting a puny average of $309 in benefits per unemployed worker per week because of the absence of an 'offset', the entire Republican Caucus -- plus Nelson and another 'Democrat' -- repeated their demand that the $55 billion of annual Bush tax cuts for the extremely wealthy be extended without any offset.

With this year's federal deficit now estimated to total $1.47 trillion, a majority of Americans agree with the comment made during the unemployment benefits debate that "the federal debt has grown to an alarming level, where it is threatening the future of our children and grandchildren". But they strongly disagree when this very honest observation is used (abused) by Republican Senators to resist major new-jobs efforts while keeping alive the "trickle-down economics" of President Reagan. Of course, the theory of 'trickling' the increased wealth of the richest Americans down to the poorest, which has created more income inequality than at any time since 1928, has been thoroughly debunked by nearly every responsible economist. Yet even more discredited is the contention that well-conceived job efforts are not stimulative -- in fact, in the medium term they are at least deficit neutral and, most likely, substantially deficit reducing.

For most of the G-20 nations -- but especially for the United States -- the truth is that both additional short-term stimulus that targets job creation and responsible deficit reduction are needed right now, and they are not, as some contend, mutually exclusive. In fact, jobs-based stimulus, because of the large multiplier effect of high-quality job creation, is a much more responsible and effective way to reduce the deficit than is slashing spending for slashing's sake.

"Cutters" argue that large fiscal deficits threaten long-term fiscal credibility and depress private confidence and spending. While generally agreeing with last year's stimulus, they now say that enough is enough, especially since so much of that first $787 million of stimulus money didn't create a meaningful number of jobs and wasn't spent very effectively otherwise. These deficit hawks are also 'owed' because of the large (and to date unexplained) disconnects between, on the one hand, President Obama's recent commitment to get the federal deficit down to about 3% of GDP by 2015 and, on the other, the IMF's very contrary conclusion that by 2015 America will have a structural deficit more than twice this figure and the Congressional Budget Office's "most likely" conclusion that the federal debt in public hands will rise from 62% of GDP this year to above 90% by 2021.

"Postponers", of which I am most definitely one, strongly agree with the need to slow the growth of long-term spending. However, right now, above all else, they're motivated to create jobs any way they can, but especially by drawing out for hiring and investment the $2 trillion of private sector cash reserves that have accumulated since the start of the Recession. "Postponers" believe that the country is at least looking ahead to a "double dip recession" -- I actually think we're already stuck in a very prolonged "L" -- and that a premature tightening of fiscal policy, instead of further fiscal stimulus, will doom us.

But "cutters" and "postponers" are not, as I said, in a winner-take-all contest, unless they foolishly insist on being in such -- and the U.S. does not have to choose between stimulus and austerity.

The ultimate 'balancer' in this critical debate should be the White House, led, I assume, by Larry Summers, who is the chief economic adviser. To his credit, Mr. Summers has in the past correctly pointed out that "in normal times...a range of considerations all make the case for fiscal prudence and reduced budget deficits."

But then he turns all of this -- and frankly all of us -- on our heads by declaring that the administration intends to be guided at this time primarily by his deficit-cutting oriented assertion that "the combination of measures that prevent sharp declines in demand in the short run and that add to confidence by controlling the factors that drive deficits offers the best prospect for moving the economy forward in the next few years."

The two realities that Summers overlooks -- and that he has overlooked for the entire past eighteen months -- are that these are not "normal times" and that the "best prospect for moving the economy forward" is to create the 22 million jobs we are missing, the latter by combining private sector capabilities with targeted large-scale Keynesian-type and Galbraith-type government intervention.

Much more than the theories and wishes of the "cutters" or "postponers", it is only the needs of voters and workers which really matter, and right now workers need Congress to first address unemployment. Voters see the absence of jobs as far and away the biggest problem facing the economy today, and they strongly favor, by two-to-one, aggressive jobs initiatives over a long-term deficit reduction program. And we owe them this attention and this priority because, as I noted, indisputable analysis shows that additional thoughtful job creation would be at least deficit neutral over the medium term and most likely deficit reducing.

Attacking jobs first does not mean we should hesitate to responsibly attack the deficit as well, starting with eliminating waste and inefficiency -- it simply means we should attack jobs first.

In reflecting on this, there's a memorable line relevant to today in Michael Hiltzik's wonderful new book, "Colossus", about the building of Boulder/Hoover Dam while the Great Depression was ravaging the nation. Hiltzik writes: "The dam's imposing mass seems to ask whether we as a nation are still capable of such an undertaking today -- whether we would still have the drive and resourcefulness to conceive it, build it, and even finish it an astonishing two years ahead of schedule."

This question of course relates to much more than just building a great dam. It is really a call by Hiltzik for vision and courage -- and for progressive economics -- like that which FDR and his advisors clearly had. Traits that if we widely displayed today would once again readily find the proper balance between cutting excesses out of the federal budget and stimulating the economy.

But instead what we have right now are the two co-chairs of President Obama's commission on the deficit saying every day things like "This debt is like a cancer" and "This pig is dead -- there's no more bacon". They are not offering a lick of optimism to our bankrupt states and municipalities and to our 30 million out-of-work Americans. This commission, and by inference the Obama administration, seem focused only on 'balancing the books' and on surreptitiously cutting back on the core of our national social contract (Social Security and Medicare) without seeing actual faces and names and cities in distress. This is cruel, and it is unwarranted under any honest economic theory.

Federal Reserve Chairman Ben Bernanke testified to the Senate Banking Committee, on July 21, 2010, that, "At the current moment, some fiscal support for the economy is an appropriate and constructive thing."

He's right.

Leo Hindery, Jr. is Chairman of the US Economy/Smart Globalization Initiative at the New America Foundation and a member of the Council on Foreign Relations. Currently an investor in media companies, he is the former CEO of Tele-Communications, Inc. (TCI), Liberty Media and their successor AT&T Broadband. He also serves on the Board of the Huffington Post Investigative Fund.