A Deficit of Ideas

You aren't crazy if you're voting for Bill Clinton. But have no misconceptions. You won't be voting to make cutting the deficit the number one White House priority for the next four years.

Some observers, notably Ross Perot, will tell you that you are crazy to vote for Bill Clinton or for George Bush. (They're right about Bush, but not because of the deficit.) These folks will tell you that if the deficit isn't attacked immediately and with austerity measures along the lines of econo-Puritanism, the country will go to hell. They are wrong.

The case for instant deficit reduction with vastly reduced government spending and higher taxes goes something like this: Yearly budget deficits have gone unpaid and accumulated over the last dozen years or so to create a $3 trillion-plus debt. That makes the country less independent since it counts on borrowed foreign cash to pay its interest--and this in turn increases the debt further.

Thus the U.S. becomes a more risky place for investment, and the government must keep long-term interest rates artificially high to attract foreign money. In addition, private savings from Americans are sucked up by the debt vacuum, which means that businesses have a smaller investment pool from which to borrow.

This, in turn, means borrowing for any purpose is more expensive--so businesses borrow less for new capital (along with everything else), and jobs aren't created. This is what economists mean when they say private investment is "crowded out" by the debt.

All of this boils down to a liquidity problem for businesses: With the huge need for money to finance the debt, savings are funneled into high-return, safe government investments--not economy-stimulating business ones. And the artificially high long-term rates channel more cash into land and rents, which are subject to value collapses.

In the long run, the deficit fear-mongers tell us, real wages fall because of high debt and the country is generally worse off.

While much of this argument works, it has two flaws--one in the reasoning and one in the solution. The first is that parts of the argument require near-xenophobia to work. In a capital market that stretches beyond borders, private investment is easily accessible, even if some of it has to come from foreigners. Even if Perot and the deficitistas are correct in saying that the debt totally crowds out Americans' private savings (and they aren't), the U.S. could (and does) attract foreigners' investment dollars instead.

Perot and his advisers talk about foreign investment as if it were destroying America. But they vastly overstate the level of foreign investment in the country, and they ignore that relying on foreign investment in itself isn't bad.

In fact, it wouldn't nearly have been such a disaster for the country if the money were spent on the right things--infrastructure, education, new plant and equipment--and not on consumer spending.

This brings us to the heart of the real debt/deficit problem--not its size, but what the spending goes to fund. Deficit spending to rebuild the country's schools, highways. communications, small businesses (through investment tax credits) and so on has high returns--returns that will mean tax revenues which will allow the country to grow (if only partially) out of the deficit.

As Clinton adviser and Kennedy School Lecturer on Public Policy Robert B. Reich puts it, "Borrowing from the future in order to invest in the future is entirely appropriate because it makes future Americans who will bear the cost of the additional borrowing that much more productive."

On the other hand, borrowing merely to give tax breaks to encourage consumerism (Bush's plan) will always fail. While it may stimulate the economy in the short term, it does nothing to provide growth (and, therefore, deficit reduction) for the future.

This isn't to say that the size of the deficit is completely irrelevant. We've outlined why we think cutting the deficit shouldn't be Job One now, but no one can defend Reagan's and Bush's getting us into this mess in the first place. While Perot overestimates the horrors of deficit spending, it's clear that deficits do cause some problems, and that we'd be better off if the overall debt were smaller.

But no matter how they feel about the relative dangers of the deficit, almost all economists would agree that now is exactly the wrong time for Perot's plan.

During the early stages of recovery from recession, the unemployment and lower living standards caused by axing spending and raising taxes would come on top of already high unemployment and declining living standards. People would hurt more, and the economy would probably slide into negative growth again. When a more strident economy emerges, the White House and Congress should then move toward tax hikes and spending cuts.

Some say this won't happen. The case for Bush seems to be that he would have nothing to lose as a lame duck by making the hard budget and tax decisions to get the deficit down. But remember that Bush wants to trim the budget so he can afford to cut taxes, not the deficit--he and Clinton agree that the deficit isn't the biggest problem in America.

Would President Clinton cut the deficit? He has promised to slash it by half in his first term. That's pretty optimistic given the new spending he would implement.

But he would be an idiot not to cut the deficit by some amount. It's too politically popular an idea, and we all know that Clinton likes politically popular ideas. In addition, once the economy is moving again, cutting the deficit will boost consumer confidence (according to most confidence polls) and thus spur the economy further. It's a win-win scenario for him.

Ross Perot and his supporters laud him as the candidate who's being honest with America. They say Americans are fooling themselves if they don't move immediately to pulverize the deficit.

But their reasoning doesn't make sound economic sense. Painstakingly balanced books may the main goal of a good businessperson, but they shouldn't be the main goal of a national economy.

Perot isn't latter-day Paul Revere, here to warn us of inevitable disaster. He's more like a political version of the Maytag Man, here to repair something that doesn't yet need to be fixed.