How to stop an economic recovery
As unemployment continues to rise, deficit hawks are upping their efforts to use the economic crisis as a pretext for gutting basic social programs such as Social Security and Medicare. The idea keeps surfacing for a bipartisan deficit-reduction commission, supposedly insulated from politics, which would agree to mandatory caps on spending and perhaps increased taxes as well. Social programs would take the biggest hit. Congress would then take an up or down vote on the whole package.
The latest ploy to promote such a commission is to use the upcoming vote on increasing the national debt, scheduled for late November. Democratic deficit hawks such as Sen. Kent Conrad of North Dakota are working with Republicans such as Judd Gregg of New Hampshire, to condition an increase in the debt on creation of a panel. They have some allies in the White House such as Office of Management and Budget Director Peter Orszag, who has intermittently signaled support for such a plan. The Senate Budget Committee will be holding hearings on this idea in mid-September, according to The New York Times.
The whole approach is bad economics and bad politics on several grounds. First, there is no evidence for the premise that financial markets are anxious about the rising debt. As Dean Baker observes, they keep buying the Treasury's long-term bonds at a low 3.5 percent interest rate. If there were worry that the increased debt would spike inflation, investors would be demanding higher interest rates.
Secondly, it is not "entitlements" that have caused the big increase in the deficit and the debt. The cause is plummeting tax collections as a consequence of the recession. Social Security will be surplus for another generation, and both the House and Senate versions of the health reform bill do not add to the deficit, but help cut costs.
Third, obsessing about debts and deficits when the economy is still losing jobs has it exactly backwards. We probably need bigger deficits for a year or two, to propel a strong recovery. Higher growth will then bring the debt back down to tolerable scale. In World War II, deficits averaged about 25 percent a year (compared to under 10% this year.) But all of that war spending rebuilt the economy and powered three decades of economic boom and the big wartime debt was soon paid off.
Finally, the idea that such a commission could be "above politics" is a deception. The politics--very conservative politics--would be baked into the cake. Republicans on it would resist higher taxes except perhaps for regressive ones such a national sales tax or value added tax. The skids would be greased for deep cuts in Social Security, Medicare, and Medicaid--even before health reform took effect. This would gut all the promises candidate Barack Obama made for a more just America.
Instead of being Mr. Consensus, and trying to please both sides, President Obama needs to weigh in strongly against the idea of a commission before it gains further traction. The House Democratic leadership, mercifully, thinks the commission is exactly the wrong medicine, and has told the White House so.
