Cutting deficits leads to an inefficient welfare state–and higher deficits

by David Gerlitz on March 1, 2013

Despite 8% unemployment, a deficit that’s already decreased 30% in the past 3 years, and a  still stagnant economy, our policy makers have decided that deficit reduction is the nation’s most pressing issue.  The stated goal is lower future deficits, but that cannot possibly be true.  Austerity efforts nearly always have the consequence of increased deficits.  Just ask Europe.

Here are the mechanics of those transactions:  As the spending cuts and increased taxes make their way into the economy, unemployment increases, leading to lower sales and lower tax revenues.  Then “automatic stabilizers” in the budget (unemployment insurance, welfare, food stamps) kick in and replace and possibly exceed the spending that was cut.  These stabilizers were added to the budget after the great depression to make sure it never happened again, and in 2008-2009, they worked.   The resulting deficits, along with the stimulus act and (no matter how wrong-headed they may have been) the bank bailouts,  underpinned the economy and prevented a full-blown depression.

But the austerity measures lead to the ultimate political sin:  bad deficits with high unemployment and little productive investment.  This inefficient welfare state then leads those whose ideology despises government to demonize Keynesian measures as “failing” and “unproductive.”  Then the next level of deficit terrorists come in and blame the weak economy on “overspending,” despite the very opposite reality.

What policy makers are doing now, regardless of the sequester taking effect or not, are condemning us to a weak economy as far as the eye can see.  It’s tempting to write this off as a meaningless political blame game, if only it didn’t have such devastating real social effects.  What’s needed–what’s always been needed–is better and targeted spending  in direct job creation (public or private) for infrastructure, education and alternative energy, or anything else we decide is socially desirable.  Then and only then will tax revenues increase, payrolls increase and the budget turn towards a productive one, no matter whether it is in surplus or deficit.

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