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Jon Talton

Analysis and commentary on economic news, trends and issues, with an emphasis on Seattle and the Northwest.

February 15, 2011 at 9:25 AM

Resident evil: Is it the deficit — or irrational fear of the deficit?

It’s almost pointless to get too deep in the weeds of the Obama budget, because whatever emerges from the congressional sausage factory will look far different. That said, we can make some assumptions. The Obama budget is probably the high end of scenarios for those who, say, are as concerned about upward economic mobility, the middle class and social justice as propping up the too-big-to-fail banks. It’s also likely the best hope for investments in infrastructure and education that would enhance economic productivity, and thus the tax base, in the future. And in all these areas, it’s middling at best.

The meme that has successfully taken over the debate is the deficit. For example, a story today reports that the deficit represents the largest share of the economy since 1945. It adds, “And within two or three years, economists fear the result could be sharply higher interest rates that would slow economic growth.” Well, maybe. The high deficit has done nothing to dampen demand for Treasury debt and interest rates remain quite low. Nevertheless, even the Obama administration is on board with deficit mania. America won’t “be running up the credit card anymore,” the president said. Republicans promise to slash $100 billion this year to appease Tea Party activists.

Amid the deficit hysteria, it’s important to remember its two major causes: The worst recession since the Great Depression and two wars, along with many other military commitments, that have lasted longer than World War II. As in 1945, the year the war ended and the deficit was even higher. Such was one of the reasons that taxes were above 90 percent on the rich in the 1950s: To pay off that debt.

Nobody in power is talking about seriously taxing the richest, really closing corporate tax loopholes, eliminating tax breaks on mergers, and returning to a more progressive tax system to hold down what is now historic income inequality. Cutting Social Security and Medicare are much in favor, and not only among Republicans or crusty old Alan Simpson, co-chairman of Obama’s deficit commission and a Social Security hater from way back. If this happens, will the deficit hawk elite ensure jobs are available for those once quaintly called “retirees”? Jobs with benefits? Also, nobody in power is talking at all about stopping the unsustainable military adventures that are helping drive up the deficit.

So here we are: A deficit that in the long run is not sustainable (that “in the long run” part is important). “Austerity” is the fad — until it really starts to bite government-program-loving Americans. This even though major budget cuts have not helped Britain, Ireland or Greece. With the world’s reserve currency and most powerful economy, America has time to get its fiscal house in order. Making the wrong choices in doing so, however, will ensure a long trip along the bottom for most Americans.

Today’s Econ Haiku:

Deutschland uber us

At least over the Big Board

Greed uber alles

Comments | More in Deficit, Infrastructure, Macro/Big picture, Politics and the economy

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