Truth Deficit

Charles Clark, a well-known Catholic economist and professor at St. John's University recently wrote this for Commonweal Magazine:

Truth Deficit

Here are some highlights (my comments in red):

The recent effort by Rep. Paul Ryan (R-Wis.) and other congressional Republicans to reduce or eliminate entitlement programs has followed the same formula. The Republicans are telling voters that the country can’t afford to help the poor, the elderly, and the sick as much as it does now. They warn that Social Security, Medicare, and Medicaid are quickly running out of money, and that without cuts to these programs the federal government will soon face a debt crisis like the one now crippling Greece.

Because two of the most prominent deficit hawks are Catholic politicians (Ryan and House Speaker John Boehner), the debate about the national debt has occasioned a debate about the ethics of balancing the federal budget at the expense of those Christ instructed his followers to help (see Matthew 25: 31–46). It is therefore important that there be an open discussion about which values are guiding our collective decisions about taxes and spending.

According to Catholic social thought, this discussion should be informed by the principles of subsidiarity, solidarity, and the preferential option for the poor. But there is another value, one fundamental to most religious traditions, that also needs to be asserted in this debate —the value of telling the truth. Politicians are haggling over which programs to cut or where to find new sources of revenue, but few have challenged the dubious premises behind the debt panic.

Voters deserve to be treated like adults, not children, and this means that politicians shouldn’t say “we can’t” when they really just mean “we don’t want to.” If some members of the House and Senate don’t think the federal government should take care of those who aren’t fully able to take care of themselves—if, say, they believe it’s up to the states or private charity to do this—then let them say so openly instead of presenting their policy preference as a matter of fiscal necessity. Small-government conservatives are now using the national debt as an excuse to cut programs they’ve long wanted to cut, even when the government was running a surplus.

The biggest economic problems the United States now faces are unemployment, income inequality, and the fact that much of the financial sector still operates like a casino. Contrary to the claim of many leading Republicans on Capitol Hill, there is no reason to think that immediate cuts to government spending will help the economy—or that spending cuts can’t wait until the economy improves.

Behind the confusion on these points are four myths about national debt that have somehow become conventional wisdom in Washington and in most of the media.

The first and most basic myth is the idea that the U.S. government is about to run out of money (Modern Money!!). In fact, the U.S. Treasury can’t run out of money because it pays its bills in money it creates. If the federal government owed its debt in Euros or some other currency—or if it had, say, a gold standard, which would limit the government’s ability to create new money—then Ryan and Boehner might be right to warn of bankruptcy. But U.S. debt is owed in U.S. dollars, a sovereign currency that isn’t chained to the value of any commodity. The U.S. government could of course decide not to pay its bills (for example, by refusing to raise the debt ceiling), but it can never lose its ability to pay them. When politicians and journalists say that the United States is in danger of becoming the next Greece, Ireland, or Portugal, they are ignoring the fact that these other countries no longer have a sovereign currency. They must pay their debts in Euros, the supply of which they do not control. They are thus like California, New York, and all the other states facing big budget deficits: they can solve their fiscal problems only by selling bonds or raising taxes. They cannot create more money.

The second big myth is that deficit spending is “crowding out” private-sector spending and investment. Only when an economy is at full capacity will an increase in government spending crowd out private-sector spending.

The crowding-out argument is based on an eighteenth-century economic theory called “Say’s law of markets,” according to which supply creates its own demand and economies are always either at full employment or tending toward it. More than two centuries of experience with capitalism has shown that this is not normally the case. Periods of high (involuntary) unemployment are as characteristic of capitalism as are innovation and rising productivity.

This brings us to the third myth about the federal government’s debt: that the problem is primarily about spending. In fact, the main problem is insufficient revenue.(Here, I agree and disagree. I agree that a lot of people are too focused on "runaway" spending. I disagree with his view that insufficient revenue is the problem. It may be the reason for the large deficit along with the automatic stabilizers, which I do agree with, but taxes or revenue drain the economy of reserves and function to maintain the value of the dollar. The government doesn't need revenue to spend, as noted by the author above, revenue's main function is to create a demand for the U.S. dollar. So, though the main reason for the deficit may be a drop in revenue, more revenue is NOT the answer, because that means more drains on the economy. However, I do think that if the deficit is going to be reduced, it is better that the rich stomach the increased taxes than the poor endure the decreased welfare support). It is probably a bad idea to raise taxes when the official unemployment rate is still around 9 percent. But the fact is, Americans are not generally overtaxed. No matter how you measure tax rates, ours are among the lowest in the industrial world—as much as 20 percent lower than those in some comparably rich countries. Politicians tell us that U.S. corporations face the second-highest marginal tax rate among the major economies, but with all their loopholes and tax subsidies American corporations actually end up paying much less in taxes than corporations abroad. Taxes on corporate income in 2008 amounted to 1.8 percent of our GDP; the average for OECD (Organization for Economic Co-operation and Development) countries was 3.5 percent.

If the federal deficit is as big a problem as both parties say it is (it isn't!), then we could substantially reduce it by paying higher taxes (we could, but that isn't the answer, and may actually increase deficits by further hampering the economy).

The last big myth that distorts our discussions about the nation’s debt is the idea that only the private sector can create wealth, and that the government is essentially parasitic. This bias against public services and public employment might make sense if your only goal is to make profits for owners of capital. But the idea that the shuffling of money on Wall Street is nobler or more important than what school teachers or nurses do ought to be deeply troubling to all Christians. As Benedict XVI noted in his last encyclical, Caritas in veritate, the Catholic tradition considers wealth to be necessarily connected with well-being, and it distinguishes between creating wealth and capturing it. There are nonproductive ways to get rich. Once we acknowledge that creating wealth is not the same as making a profit, we see that governments create wealth all the time—and that without government involvement there would be very little wealth creation at all (a point Adam Smith understood much better than some of his current disciples). Governments build roads, schools, dams, and countless other things that contribute to the capital stock of the nation. Governments define and protect property rights, without which the only private wealth would be whatever you could personally defend. Most of the large accumulations of private wealth stem from government contracts, special tax treatment (subsidies), or the privatized benefits of government investments in research. Finally, some of the government’s debt is private-sector wealth (it owes that money to someone), so when the U.S. government reduces its outstanding debt, it also reduces private-sector wealth, here or abroad. We should also remember that every time the federal government has moved to sharply reduce its debt a major recession followed (which modern money theory explains quite nicely).

The church teaches us to promote the common good, to help the poor and marginalized before we help ourselves, to see in them the face of Jesus. The first Christians called this “the way of life.” The earliest manual on Christian practice, the Didache (50–150 AD), warns us against following the way of death, the way of those who “have no mercy for the poor, do not work on behalf of the oppressed…who turn away from someone in need, who oppress the afflicted, are advocates of the wealthy.”

How do we help the poor and oppressed in a twenty-first-century economy? Before we allow representatives of the Tea Party to slash government spending on programs for the elderly, the sick, and the unemployed—modern programs that were designed to meet modern needs that neither Adam Smith nor our Founding Fathers could have anticipated—we should demand solid evidence that the richest country in the history of the world really cannot afford to take care of its most vulnerable citizens. We should make sure we are not reducing our commitment to the least of our brethren so that the richest 5 percent can grab an even larger share of the country’s wealth. The urgent danger facing us now is not that America is about to drown in debt, but that discredited, ahistorical economic theories will scare us into abandoning our most important values.