THE BLOG
10/13/2014 09:35 pm ET Updated Dec 13, 2014

The Deficit Is Down and the Deficit Hawks Are Furious

Last week the Congressional Budget Office reported that the deficit for the 2014 fiscal year that just ended was $460 billion, considerably lower than they had previously projected. This puts the deficit at 2.7 percent of GDP. At that level, the size of the debt relative to the economy is actually falling.

Not only is the deficit down sharply from its levels of 2009 and 2010, when it was near 10 percent of GDP, it is below the levels that even the deficit hawks had targeted back in those years. In other words, even if we had followed the lead of deficit crusaders like Erskine Bowles and Alan Simpson, the deficit would be no lower today.

If anyone thought this would make the deficit hawks happy, they are badly mistaken. They are furious.

Fred Hiatt, the editorial page editor of the Washington Post, fumed about Obama's "false victory over the deficit," and warned that if there are no changes in policy, the debt to GDP ratio will soon begin rising again hitting an "insupportable 106 percent by 2039." One could find similar expressions of outrage from the various Peter Peterson-funded organizations like Fix the Debt or the Committee for a Responsible Federal Budget.

This ranting is utter nonsense. If Fred Hiatt had bothered to do any homework, he would have discovered that if the debt held by Social Security is included, the current debt to GDP ratio is already 103 percent of GDP, almost identical to 106 percent number that for unknown reasons he asserts is insupportable.

The other absurdity of the deficit hawks' complaints is that lower deficits are slowing growth and costing jobs. This is no longer just the view of progressive economists; even the I.M.F. is now trying to explain that by reducing deficits, we are slowing growth and throwing people out of work. As Oliver Blanchard, the I.M.F.'s chief economist paradoxically argued: "When you see people in trouble because they have too much debt, the solution is actually to create more debt."

Blanchard's point is that we need to create more demand in the economy, and this will require more government debt. Whatever they may be thinking, the deficit hawks' agenda will weaken the economy.

Since the deficit hawks are fond of putting debt as a generational issue, lower deficits today mean throwing children's parents out of work. In many cases it will mean that children's parents will lose their houses, they may even go homeless. That should be great for the kids.

But the deficit hawks have a bigger agenda. As just about everyone now knows, the major story in the economy over the last three decades has been the massive increase in inequality. The share of income going to the top one percent has roughly doubled since the 1970s, from 10 percent to 20 percent. As a result, most workers have seen almost none of the gains from economic growth over this period.

There are many people who would like to see this upward redistribution reversed, or at least not see the income gaps get still larger. A range of policies, from raising the minimum wage and more union friendly labor policies, to taxing Wall Street and full employment trade and Federal Reserve Board policy have been pushed to ensure that workers get their share of the economy's growth.

By contrast, the deficit hawk gang is perfectly happy to see this upward redistribution continue. After all, they and their patrons have been the beneficiaries.

This is how we have to understand the fixation on the deficit even as it fades from anything that can remotely be seen as problem in the real world. The deficit hawks want to distract us from an equality agenda and instead scare us with stories about exploding deficits that will bankrupt the country and impoverish our children.

Hence we get absurd stories about hundreds of trillions of dollars of debt that we get from adding in projected spending on Social Security and Medicare over the next millennium. We also got the pathetic ritual of deficit hawks playing the race card, telling us that the beneficiaries of Social Security and Medicare are mostly white, while workers are increasingly black, Hispanic, or Asian.

This complaint is absurd at many levels, but most obviously due to the fact that any cuts to these programs will hit primarily in the future. Almost no one proposes cutting current benefits in a big way. Instead they will phase in cuts for future retirees. This means that the cuts will hit hardest when today's black, Hispanic, and Asian workers will be getting Social Security and Medicare.

But the key point is to keep your eye on the ball. The real money is going to the rich, not to Social Security and Medicare. Suppose that we raised payroll taxes by three percentage points to pay the cost of these programs in 30 years.

Even a deficit hawk could figure out that this amounts to a 3 percent cut in workers' pay. However if we continue to see the same upward redistribution of income over the next three decades that we have seen over the last three decades, it will cost workers roughly one-third of their wages in 30 years. In other words workers stand to lose ten times as much from current trends in inequality as they stand to lose from even very large increases in the Social Security and Medicare taxes.

Those two numbers should make the deficit hawks' agenda clear. It is about getting people to obsess on the cost of their own retirement and to ignore the rich people who are stealing them blind. When we recognize this fact, it is understandable that Fred Hiatt would be upset when lower than projected deficits make these scare tactics more difficult.