The GOP’s Deficit Boogey Man

The GOP is still pitching invisible boogeymen to voters, and the biggest, baddest boogeyman since President Obama took office, albeit never before then, has been the federal deficit. Why is it that some people are inherently more inclined to believe in what is not right there in front of them, than what is? England was well on its way to recovery. PM David Cameron was elected and followed Europe’s lead and implemented drastic spending cuts. Two years later the UK joined the Euro zone in a recession; a double-dip variety for the UK.

Funny how deficits never bothered the likes of Presidents Reagan, neither President Bush, nor any Republican administration since Republican President Calvin Coolidge valiantly reduced the federal deficit immediately prior to the Great Depression.

But worse than people who deny climate change, I get more denial from the group that believes:

  1. The fiscal cliff is Tax-mageddon
  2. Austerity is helping the Euro zone promote growth and
  3. Britain’s governing coalition that implemented its own austerity program isn’t tearing itself apart over missed budget targets

And these are the countries’ leaders!! No wonder so many voters get it backwards.

What Does It Take to Convince People That Spending Cuts is a Recovery-Killer?

Factually, there is no fiscal crisis in the United States, Britain or most European countries. I know that when I say this it upsets people who have to balance checkbooks, but I’m sorry, it’s true. Even Italy and Spain could recover nicely if this obsession with spending wasn’t so deeply ingrained AND misunderstood.

Greece is entirely another matter, but the very explicit Greek disaster hardly justifies a generalized global panic about all government debts unless one takes the time to understand macro-economics.

Statistical facts:

  • Interest rates are lower today than at any time in history, meaning that governments can borrow money cheaper than, well, EVER!! Does that suggest impending bankruptcy?
  • The investors falling all over themselves to lend them money are not naïve widows and orphans or government-controlled central banks. These are hedge funds, billionaires and the sovereign-wealth funds of financially sophisticated nations like Norway and Singapore.

Why are sophisticated investors indifferent by the deficit panic? Because they know that governments, at least outside the few euro zone exceptions, are nowhere in the neighborhood of bankruptcy.

In fact, debt levels are not even dangerously high. The U.S. government net debt is expected to stabilize at 89 percent of gross domestic product from 2014 to 2017, according to the International Monetary Fund, even if all the Bush tax cuts were extended and without any of the spending cuts assumed in the fiscal cliff.

So What Is Considered a Dangerously High Debt Level?

Republicans needing talking points notwithstanding, similar future stable debt levels are projected for Germany, France, Italy, Britain and even Spain.

Even if one assumes debt levels do stabilize in the range of 85 percent to 100 percent of GDP, these won’t be disturbingly high. U.S. national debt peaked at 110 percent of GDP in the late 1940s, and Britain’s was even higher (133 percent). But nobody worried much about national bankruptcy after World War II. Why? Because GDP fluctuates. It’s fluid. (If spending cuts reduce GDP, which they do, why on earth implement them?)

The confidence was vindicated. For the U.S. and Britain both enjoyed their strongest economic performance in the two decades after their deficits peaked at more than 100 percent of GDP. And of course as GDP grew, the debt-to-output ration also came down. It really is simple arithmetic.

The U.S. and British fiscal situations today are profoundly less disconcerting because:

  • Two-thirds of the government debt issued since the 2008 crisis has been bought by the central banks. Since the Federal Reserve and the Bank of England are not going to bankrupt their own countries, the bonds they own represent debts the government owes essentially to itself.
  • A mere 7 percent(rounded) of U.S debt is owed to China, the U.S.’s single largest external creditor. In micro-economic terms, most Americans owe more than that to a department store.
  • Most U.S debt is owed to the Social Security Trust Fund because war-mongering George W. Bush fought two wars with Social Security’s money.

Once central bank holdings are consolidated within the government, the true burden of debt owed to the public falls to roughly 65 percent of GDP in both Britain and the United States.

Britain finally began to acknowledge the ineptitude of their fiscal austerity reality last Friday, when the Treasury decided to credit back to itself the interest payments it had been theoretically making to the Bank of England. Just like that, this will slash £35 billion off government deficits and spending.

The next logical step might be to cancel completely the £375 billion worth of bonds held by the Bank of England, thereby reducing reported debt by some 25 percent of GDP.


Why must Republicans refuse to accept such obvious reforms, which could easily reduce debt burdens and dismiss public fears about national bankruptcy? There are four reasons; and the last one is reprehensible.

  1. There was a point in the 2008-09 crisis when borrowing really did get dangerously out of control. Genuine fiscal disasters seemed possible in 2009 unless tax revenues steadily recovered, which happened rapidly in the United States, Germany, China and other countries that refrained from extreme tax hikes or public spending cuts by relying on economic growth to bring deficits under control. In Britain, and southern European countries, over-zealous deficit reduction proved counterproductive and public debt burdens increased faster because austerity strangled economic growth.
  2. A second valid worry is that all advanced economies had genuine simultaneous fiscal problems caused by demographics and escalating health-care costs; neither of which have anything to do with the huge, but temporary, deficits caused by the 2008 global financial crisis. There’s simply no need for emergency actions that exacerbate economic weakness and make fiscal prospects even worse.
  3. A third respectable reason for political (not economic) anxiety is fear of inflation. Large deficits can only be financed at low interest rates if central banks lend to governments on a huge scale. But even with the QE programs implemented by the Federal Reserve Bank did not cause inflation or currency “debasement.” Why? The money printed to finance government was scarcely enough to offset the shrinkage of the money supply caused by de-leveraging commercial banks.
  4. The fourth, and frankly disgraceful, reason for public fiscal panic is that conservative politicians, opposed in principle to all government, exploited deficits to demand cuts in government spending, while denying that higher taxes could play any role in reducing deficits.

But now the worm has turned. After the November 6th U.S. election deficit phobia no longer grips the country nor implies drastic cutbacks in public spending. Instead, it is becoming the main argument for higher taxes; especially on the affluent.

Sorry conservatives, you’ll have to find some other boogey-man to scare the bejeezus out of voters. Even if you spend a billion dollars, a sufficient number of voters can till still tell when you’re trying to sell them  a load of batcrap crazy.

Harvey Gold

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