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Now is Not the Time for Austerity

The Debt is Not the Threat

by MARK WEISBROT

Various political demagogues and Wall Street interests have mounted a campaign to convince Americans that despite persistent massive unemployment for the foreseeable future, more than 15 million people underwater on their home mortgages and two unnecessary wars, what we really should be worried about is America’s national debt.

It doesn’t help that most of the media pretends not to understand the basic economics, accounting or arithmetic of the issue. Let’s start with the economics: The Obama Administration forecasts unemployment of 10.0, 9.2 and 8.2 percent, respectively, for 2010-2012. The rate does not fall to the 5.2 percent rate it considers full employment until 2018.

The difference between 10 percent unemployment and 5.2 percent is more than 7 million people without jobs. And that doesn’t count the increase in millions of people involuntarily working part time, or millions who leave the labor force because they can’t find work.

This is unacceptable in any civilized society; but even more outrageous in the world’s richest country. It means millions of ruined lives and permanent scars that will persist for years and possibly decades – in the form of increased poverty, lower educational levels, mental illness, suicide, crime and other social ills.

This means that our government’s stimulus package was too small, which fits with the data: In 2009, taking into account the spending cuts and tax increases of state and local governments, it was less than one percent of GDP. That is why the stimulus is estimated as having saved about 1.6 to 2 million jobs, whereas we are down about 8.5 million jobs since the recession began.

Bottom line: We need more stimulus, not less; this is not the time to be worrying about deficits or national debt.

It is clear that there is no short-term problem with running large deficits in a weak economy: Investors are buying up even long-term U.S. Treasury bonds at remarkably low real interest rates. Clearly the markets do not perceive that our government is heading into risky territory with its debt. Interest payments on the debt are currently just 1.4 percent of GDP.

For the long term, as the CBO has emphasized, the vast majority of the deficit and debt problem is just rapidly rising health care costs. Of course, we could be like other developed countries and have universal health care, and pay about half of what we are now paying per person. That is the average for the other high-income countries. This would take care of our long-term federal debt problems.

Another significant contributor to our long-term debt is the military. On an annual basis, we spent 5.0 percent of GDP on just the Defense Department budget last year. Before 9/11, the CBO had projected just 2.4 percent for 2009. The difference is more than twice the long-term shortfall in our Social Security system, and it is based on an understatement of military spending. Maybe we need to focus on protecting our airports from already existing terrorists rather than recruiting more by occupying foreign countries. Maybe we don’t need hundreds of military bases all over the world.

But thanks to the power of what President Eisenhower famously named the “military industrial complex,” President Obama has exempted the military from any spending freeze. Thanks to the two most powerful lobbies in Congress – insurance and pharmaceutical – getting health care costs under control is still a distant dream. And then there’s the people who make the nation’s major economic decisions and actually brought us this mess – Goldman Sachs and their Wall Street friends: They want to put Social Security on the chopping block to pay for their crimes (and bonuses).

MARK WEISBROT is an economist and co-director of the Center for Economic and Policy Research.