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Richard (RJ) Eskow Headshot

Six Things Everybody Knows About Deficits... That Are Completely Untrue

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Thanks to the generous support of billionaires and self-interested corporations, think tanks have seeded our political discourse with a lot of mistaken ideas about government spending and deficits. For too many journalists, consultants, and policy makers, these ideas are "givens," things that everybody knows... which also happen to be totally wrong.

Here are a few of them.

1. Deficits are caused by government spending.

That's like saying empty gas tanks are caused by driving. They're actually caused by driving and not filling up the gas tank. Sure, one way to prevent empty gas tanks is to just stop driving. But if you need to get somewhere -- as either a person driving a car or a nation rebuilding its economy -- you can also stop at a gas station. A rational person would drive when it's necessary, drive less when they can, and fill 'er up when the tank's running low.

The primary drivers of our current budget deficit are:

a) The wars in Iraq and Afghanistan.
b) Wall Street greed and corruption, and the resulting economic collapse.
c) The Bush tax cuts.

So in a year when the president and the Republicans are trying to one-up each other on who can cut deficits the fastest, which three topics are almost never addressed as budget-busters in the media?

a) The wars in Iraq and Afghanistan.
b) Wall Street greed and corruption, and the resulting economic collapse.
c) The Bush tax cuts.

Deficits aren't caused by spending. They're caused by spending more than you collect. Yet in a year when the mediasphere is breathlessly sounding the alarm over "entitlement" programs like Medicare and Medicaid, which will cost around $800 billion this year, it remains rather silent about ten years' worth of tax "entitlements" -- sorry, tax "breaks" -- to the wealthiest 2% of Americans, which cost more than $1 trillion.

Despite what you've heard, "deficit reduction" and "spending cuts" aren't synonyms.

To his credit, the president is proposing to raise taxes on the wealthiest 2% or Americans -- or rather, not to renew the extension of these cuts agreed upon in last December's deal. But he's focused his rhetorical firepower on spending cuts, not raising revenue. And spending cuts account for two-thirds of his deficit reduction plan, while increased revenue only accounts for only one-third. (And that's before the backroom negotiations even begin.)

Maybe it's us, but so far the president's defense of his revenue-raising proposals seems... well, unenthusiastic. We'll find out soon whether he's proposing them in a got-to-have-them-or-there's-no-deal way, or whether he's proposing them in a I'm-planning-to-trade-them-away-like-I-did-the-public-option-and-the-same-tax-increases-last-year way. Either way, it's come to this: The president's proposed revenue hikes are modest, but our conservative-think-tank-generated, media-fueled reality distortion field is so pervasive that he must make needless, symbolic cuts to programs for the poor (including fuel oil to help them make it through the winter) in order to earn credibility on the topic of deficits.

In this reality warp, credibility can never be earned by tamping down the accumulation of wealth for top earners with a modest tax hike -- one that comes after a forty-year period during which their taxes were cut by more than half. And it can only be earned with spending cuts for "programs the president cares about," not "programs Republicans care about."

2. Neither the Republican budget nor the president's budget propose cuts to Social Security benefits.

I've heard this one several times in the past few days, and it's wrong. The president's budget doesn't cut Social Security -- at least not so far -- but Rep. Eric Cantor says that the Republicans will propose cuts to both Social Security and Medicare. And while the Republican Continuing Resolution for Fiscal Year 2011 doesn't explicitly cut Social Security benefits, it provides $625 million less to administer those benefits than was provided last year -- and nearly a billion dollars less than was originally budgeted.

That means that people will receive less in benefits, whether they're officially "cut" or not. There are already agonizing delays in the appeals process for people who have been denied disability benefits. Further cuts will deny even more people of benefits that in many cases they've paid for and deserve -- and could lead to many more problems for people receiving retirement benefits, too.

The president deserves credit for trying to increase the administrative budget by a modest amount. But the Republicans, while claiming not to "cut" benefits, are cutting a tiny percentage from the overall budget when they propose to cut funding for the Social Security Administration. That won't make a dent in the deficit. They're doing that so that fewer people will collect the benefits that still exist -- but which for them will only exist on paper.

3. "We have to live within our means so we can invest in the future."

This trope comes from Jacob Lew, Director of the White House Office of Management and the Budget, in a blog post defending some of the Draconian reductions in the White House's new budget. It encapsulates the "cut for growth" argument in a nutshell.

But in decades of private-sector work, I never heard an executive say that a company can or should "invest" and "cut" at the same time. If a corporation did something like that, chances are it would be sacrificing its core business while at the same time moving into uncharted waters.

What do businesses usually do when they want to invest? They borrow. They're especially happy to borrow at times like these, when money is so cheap. Economically and managerially, the "cut-to-invest" concept is financial mumbo-jumbo. Sure, sometimes you need to cut. And sometimes you need to invest. But they're separate issues and separate decisions, each of which requires its own justifications.

This is a perfect time for government to engage in short-term stimulus spending to get the economy moving, and to create jobs for people who will then start paying taxes... which reduces the deficits. In other words, the next two years or so should be a time for any government with a smart, private-sector management mindset to invest in both its core "businesses" and in R&D for the future.

4. More concessions to Corporate America will lead to more jobs.

The logic goes like this: If we give more tax breaks to corporations they'll have more money, and they'll use it to hire people.

Wrong. Corporate America may not have as much cash on hand as the two trillion dollars you've read in the papers or heard the president say, but it has a lot. And the mega-corporations that dominate the economy also have access to very cheap credit.

What does that tell us? That the problem isn't cash. It's demand. They're holding on to the money because people aren't buying their products. Demand has picked up a little, but not nearly enough. That means the answer isn't to give corporations more cash, it's to give consumers more cash. Then they'll buy products, which will give businesses a reason to start hiring and investing again.

Corporations aren't sitting on that cash because they like to see big numbers in their bank account. If a CEO had willing customers lined up but wouldn't spend money to meet their demand profitably, she or he would be fired. Tomorrow. How do you create more demand? By creating more jobs, and by putting more money in the pockets of people who'll spend it rather than save it. That means stimulus spending for jobs and growth. And when it comes to Social Security, it would make more sense to increase benefits than it would to cut them. Most of that increase would be spent for goods and services -- in other words, more demand.

Remember, we want to get businesses to spend their cash. Maybe they don't have two trillion on hand. But if we could get them to spend, say, $1.5 trillion, financed by a combination of cash and borrowing, it would be more than our entire projected deficit for the year. So why not put our money where it will more than pay for itself by stimulating private investment -- and help people who are hurting? The alternative, after all, is years of ongoing joblessness -- a plight that not only causes untold suffering, but also robs the government of tax revenue.

Targeted government spending can trigger more private-sector investment, leading to a cycle of growth and job creation. That way leaders in government and business can be both good managers and good people. It doesn't always work out that way, so when an opportunity like that comes along, why not grab it?

5. Government debt soared because of the last financial crisis... but we can fix the debt problem without ending the Wall Street behavior that will cause the next crisis.

The 2008 financial crisis caused the national debt to soar, both because of the increased expenditures that were needed and because the government lost revenue from millions of workers who lost their jobs and stopped paying taxes. Then there were the fiscal crises triggered in state and local governments, which caused even more damage.

"Deficit reduction" programs that don't rein in Wall Street's gambling and fraud are like bailing out a boat that's still got a hole in the bottom.

Could the financial crisis happen again? JPMorgan Chase CEO Jamie Dimon says it will happen again -- every five to seven years. He should know: He's a fierce defender of "too big to fail" banks and a deregulated financial sector, two major causes of the last crisis. Dimon is now fretting that the deficit is a major threat, and saying that "governments have to show the will" to get them "under control."

But you can't get deficits under control when the Wall Street casino is designed to collapse every five to seven years, and when it will cause massive increases in debt every time it does.

6. Medicare, Medicaid, and Social Security are a huge deficit problem.

Jackie Calmes of the New York Times does some excellent work. But her coverage of the budget debate today is not one of her better moments. She writes that "... the most pressing long-term budget problem (is) the huge costs in the Medicare, Medicaid and Social Security programs as the population ages and medical costs rise." In fact, this statement -- issued in the "paper of record" as undisputable fact -- is objectively, factually incorrect.

The truth: Social Security "spending" for 2011 is projected to be $695 billion this year. How much does that add to the Federal deficit or the overall budget and its deficits? Social Security is separately funded by a dedicated tax, not general revenues, and this year's projected shortfall between revenues from that tax and Social Security expenses $41 billion, not $695 billion. $41 billion is less than the cost of extending the estate tax break for one year - a $68 billion break (shouldn't that be "entitlement"?) that will benefit Paris Hilton or other rich heirs and heiresses.

So does that mean that Social Security is only adding $41 billion to the deficit this year, instead of the $695 billion I saw in the papers? No. It's adding zero to the deficit. This self-funded program is forbidden by law from ever adding to the deficit. It has a $2.6 trillion (that's "trillion" with a "t") surplus and will return to profitability in a couple of years, before finally using up its surplus so that it can pay "only" 75% of benefits -- nearly three decades from now. There are easy fixes for that, especially lifting the cap on the payroll tax. But apparently anything that discommodes the glitterati doesn't fit the prevailing narrative. Whatever the reason, everybody's pretending that option doesn't exist.

I guess you could say that these "entitlement programs" -- connected only in this case by the inflammatory-sounding word "entitlement" (as in "he acts, you know, entitled") -- represent around 21% of the budget, since that's roughly what Medicare and Medicaid cost. But you might as well say that "Medicare, Medicaid, and Justin Bieber's haircuts contribute 21% to the Federal budget," or "Medicare, Medicaid, and those Egg McMuffins you keep ordering for breakfast are the most pressing budget problem the Federal government faces." It's nonsensical. When journalists who are supposed to be objective write in straight news pieces that the costs of "entitlements" -- Medicare, Medicaid, and Social Security -- "could overwhelm the government and crimp the economy if not addressed," as Calmes did, that's demonstrably untrue and calls for a formal correction.

Why don't reporters just say that "Medicare and Medicaid are the main cause of future deficits and must be addressed"? We don't know. We do know that a lot of funding has gone into promoting the "entitlements" slant to the story, rather than the more accurate "runaway health care costs" angle. And we know that our runaway health care costs raise some topics that are considered off-limits these days: The fact that countries with publicly-provided health care pay much less than we do. The role of for-profit insurers and hospitals in driving up costs. Income levels for some specialist physicians that are much higher than they are anywhere else in the world. Poorly designed incentives for doctors, hospitals, and other medical facilities.

Besides, they've wanted to dismantle the New Deal for 75 years, and Social Security's the heart of the New Deal. Like the man said: Never let a crisis go to waste.
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Richard (RJ) Eskow, a consultant and writer (and former insurance/finance executive), is a Senior Fellow with the Campaign for America's Future. This post was produced as part of the Curbing Wall Street project and the Strengthen Social Security campaign. Richard also blogs at A Night Light.

He can be reached at "rjeskow@ourfuture.org."

Website: Eskow and Associates