We Need a Large Federal Government Deficit

We Need a Large Federal Government Deficit

The Federal Government Deficit: An Essential Tool for Putting People Back to Work and Ending the Economic Downturn

The U.S. economy is stuck in neutral. The engine is turning over but at a very low level. There is little forward movement. Firms don't need workers to produce things because few people are buying. Households have little money to spend. State and local governments are cutting back. Because no one is buying, businesses are maintaining low levels of production; they are not hiring nor purchasing. So the only way to reduce unemployment and get the economy fully functioning again is for the federal government to act. It must boost the demand for goods and services by buying more itself.(1) This will spur firms to increase production by hiring more workers. These workers will have more money to spend, boosting demand even more, causing more firms to hire more workers, and on and on. Once this cycle is well underway, the government can pull back its efforts.

A federal government deficit is the key to the turnaround. The government must spend more than it collects in taxes and fees. If instead of running a deficit, the increase in government spending were offset by higher taxes then there would be no boost in demand. Government's increased buying would be offset by reductions in households' purchases since they would have less to spend after paying their higher taxes.

The large government deficit in 2009 did stimulate the economy. The Stimulus Bill (one part of the deficit that has been studied for its impact on jobs and incomes) created or saved over two million jobs,(2) lowered unemployment, kept an estimated 6.2 million people out of poverty,(3) and made a major contribution to ending the recession. Since the third quarter of 2009 the production of goods and services (gross domestic product) has been rising, not falling. Officially, the recession is over. But the hard times aren't. The US needs 10.6 million additional jobs to return to the pre-recession unemployment rate.(4)

To strengthen the economy and put people back to work, the government needs to continue to run sizable deficits. Federal government deficits can be a problem. Running a federal deficit when the economy is reasonably strong is unwise. But not running a deficit when the economy is weak is extremely unwise. There is no other way to boost the economy and stimulate job creation.(5) 

Recent history of the federal deficit.  Unfortunately, when the crisis began the federal budget was already in deficit and had been for most of the 2000's. At the beginning of the decade in 2001, the federal budget was in surplus and had been in surplus for four years. The nonpartisan Congressional Budget Office forecast the surplus would continue to grow over the decade. But instead, the Bush tax cuts and the war in Afghanistan (and later the war in Iraq) resulted in deficits starting in 2002 that continued throughout the decade.

The economic downturn that began in late 2007 further increased the deficit. In the last fiscal year that ended in September, 2009, about 30% of the deficit was due to economic conditions: reduced tax revenue and higher safety net spending for things like unemployment insurance and food stamps. Another 30% was the result of spending for the stimulus and bailing out the banks and auto industry. But fully 40% was due to the Bush Administration's tax cuts favoring the wealthy and the costs of the wars in Iraq and Afghanistan.(6)

During this crisis we need a large deficit. It is what is going to turn around the economy. Our problem is that the deficits are projected to continue even after the crisis is over.

Future deficits.  The most significant cause of future deficits, those that will continue once this downturn is past, is health care costs. Medicare and Medicaid, as well as smaller health care programs paid for by the federal government, are a large and growing share of the federal budget. This is a major reason why health care reform is so important. The deficit will continue to be a problem so long as health costs continue their relentless upward climb. None of us should ignore this problem. We also need to understand that while costs are growing rapidly in Medicare and Medicaid, the rise is even faster in private health insurance.(7) Fundamental reform is urgently needed.

Looking forward over the coming decade (2009-2019), the cumulative deficit is largely due to factors unrelated to the economic downturn or the stimulus and bailout policies. Fully 45% of the deficit is due to the Bush Administration tax cuts.(8) Another 15% is the projected cost of the wars in the Middle East.(9) The stimulus package and financial bailout are responsible for less than 14% of the 11-year deficit.

What to do. Ending the current economic crisis is our priority. Federal government budget deficits must be maintained until the economy is strong and producing the jobs we need. In addition, Congress must pass fundamental health care reform that includes rigorous and effective cost containment. Once the economy is back on track, the deficits must be addressed. Financial speculation could be moderated through a small financial transaction tax that would also raise significant sums.(10) Corporate tax reform must close loopholes that allow the use of tax havens and offshore tax evasion. Taxes paid by the wealthiest Americans must be increased. The U.S. is an extremely wealthy country. We can balance our books and provide for all our people, if we have the will to do so. Our faith calls us to do no less.

Also see the column by Nobel prize-winning economist and New York Times contributor Paul Krugman, "Fiscal Scare Tactics"  http://www.nytimes.com/2010/02/05/opinion/05krugman.html


[1] The only other way to stimulate the economy is to lower interest rates. But this has already been done. Rates in the U.S. have been essentially at zero for months.

[2] Bivens, Josh. "How We Know the Recovery Package is Helping," Economic Policy Institute.  Oct 2009.   http://epi.3cdn.net/bb4f1bd7339f12b9a3_4im6bxb5c.pdf

[3] Testimony: LaDonna Pavetti, Director of Welfare Reform and Income Support, on the Impact of the Recession and the Recovery Act on Social Safety Net Programs Before the House Budget Committee, December 9, 2009   http://www.cbpp.org/cms/index.cfm?fa=view&id=3028 

[4] Shierzholz, Heidi, "Labor market closes 2009 with no sign of robust jobs recovery."  Economic Policy Institute, January 8, 2010  http://www.epi.org/publications/entry/jobs_picture_20100108/

[5] The government's only other possible intervention, lowering interest rates, is no longer an option. Interest rates have been reduced to essentially zero.  

[6] Ruffing, Kathy A. and James R. Horney. "President Obama Largely Inherited Today's Hugh Deficits: Economic Downturn, Financial Rescues, and Bush-Era Policies Drive the Numbers." Center on Budget and Policy Priorities. December 2009.    http://www.cbpp.org/files/12-16-09bud.pdf

[7] "Private plans' spending per enrollee has grown substantially faster than Medicare spending per enrollee, especially in the last decade or so." Hacker, Jacob, "The Case for Public Plan Choice in National Health Care Reform," pp. 10-11. http://institute.ourfuture.org/files/Jacob_Hacker_Public_Plan_Choice.pdf See also Centers for Medicare and Medicaid Services, National Health Expenditure Data, Table 13  http://www.cms.hhs.gov/NationalHealthExpendData/downloads/tables.pdf

[8] This assumes the predominant view that tax cuts will not be sun-setted at the end of 2010 and that the Alternative Minimum Tax continues to be adjusted for inflation. For more information see Ruffing and Horney, op. cit.

[9] Ruffing and Horney, 2009, op cit.

[10] Economic Policy Institute. "Paying for the American Jobs Plan with a financial transactions tax," http://www.epi.org/index.php/american_jobs/paying_for_the_plan


Contact Info

Edith Rasell, Ph.D.
Minister for Economic Justice
700 Prospect Ave.
Cleveland, OH 44115