What Should be the Goal for Deficit Reduction?

Wednesday, March 20, 2013 at 6:11 PM by

The two houses of Congress are considering very different budget resolutions this week.  Much of the debate has been about the very different paths they take to reducing the deficit – and whether the deficit should be brought down by spending cuts alone or by a combination of spending cuts and new revenue. 

Although the route to deficit reduction is a very important part of the deliberations, it’s unfortunate that there hasn’t been very much public discourse about another very fundamental aspect of the debate – the timetable and goal for reducing the deficit.   A short paper released today by the Center on Budget and Policy Priorities (CBPP) examines that question.  It explains why the goal should be to get debt under control, not to set out to eliminate it completely during a time when the economy economic recovery is still anemic. 

The paper critiques the frequently cited argument or analogy that families and state governments must balance their budgets so the federal government should do so as well.  It explains some of the flws in that analogy:

“First, families do not balance their budgets every year. For example, when a family buys a house or sends a child to college, it often takes out a mortgage or loan — and thereby runs a “deficit.” If a family had to balance its budget every year, it could spend only what it earned that year, which would preclude important investments that could raise its income and well-being in the future.

“Second, while states must balance their operating budgets, they can borrow to finance their capital budgets, which include long-term investments such as roads and schools. If state budgets were constructed as the federal budget is, with no separate capital budgets, most states would be out of balance.”

One of the important points that the paper makes, at least implicitly, is that a key objective of fiscal policy is a strong economy — an economy that can produce private sector gains in employment and income, and yield revenue growth that supports the public sector.  An obsessive preoccupation  with eliminating the deficit by a specific date can be counterproductive by slowing economic growth, thereby suppressing the rebound in tax revenue and creating additional need to spend for safety net services.  The experience of many European nations in recent years illustrates the paradox that austerity policies intended to reduce the deficit can have the opposite effect by causing economic contraction.  

However, I’m starting to channel Paul Krugman, rather than sticking with the explicit points in the short CBPP paper.   You can find that paper  here.   It’s worth reading because the timing and goal of deficit reduction is is such an important and largely overlooked part of the budget debate that we should be having.

Jon Peacock

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