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Neil H. Buchanan

Do Voters Really Care About Deficits? Why They Don't, and Why They Should Be Much More Worried About What Might Be Done in the Name of Deficit Reduction


Thursday, November 4, 2010

Do the American people really care about the federal budget deficit? This election season saw Republicans score victories by emphasizing their opposition to deficits, government spending, and "government-run health care." Thus, it should not be surprising to see some politicians concluding that this election was a mandate for controlling a supposedly uncontrollable federal government. But is there truly good reason to believe that so many people switched their votes from the Democrats in 2006 and 2008 to the Republicans in 2010 because they want the deficit to be decreased?

It seems much more likely that this election was, as only a few commentators have noted, simply a statement by voters that they want the economy to get better. Ironically, however, the people whom the voters have now installed in office have either completely dodged the question of what they would do to improve the economy, or proposed policies that would affirmatively harm the economy going forward.

In this column, I will discuss the apparent condemnation of the federal budget deficit by mid-term voters. After showing that the things that people care about really have nothing to do with reducing the deficit, I will describe why even economists cannot categorically condemn deficit spending. Finally, I will discuss why it would be especially damaging and foolish for President Obama and his supporters to feel pressured to go along with efforts to cut the federal deficit by any means other than cutting health-care spending.

The results of this election will inevitably be overstated by those who wish to claim that it was a mandate for their favored outcomes. The Democrats' losses were, however, proportional to their being the party in office during a mid-term election, and during a very deep economic downturn. Losing sight of that bigger picture will hurt the economy, the nation's workers, and the Democrats themselves.

Why Do Voters Say That They Care About Deficits?

Virtually anywhere one might have looked in 2010, it seemed that there was a politician condemning the federal deficit and federal spending. On one level, this is easy enough to understand. The deficit rose to more than nine percent of the Gross Domestic Product during the past few years, as spending on various safety-net programs rose in tandem with the unemployment rate.

This was not in the least bit surprising, of course, since the deficit always goes up when the economy gets weaker. This is known as the "automatic stabilizer" function of the federal budget, because tax receipts automatically fall and spending (on things like unemployment benefits) automatically rises whenever the economy weakens, and vice-versa. This keeps the economy in a much narrower range of income than would otherwise be possible, because it keeps recessions from intensifying into depressions, yet it also keeps prosperous times from becoming unsustainable booms. The deficit's increase, therefore, was both entirely predictable and a completely healthy response to an unhealthy economy.

Even if that were not true, however, it is interesting to consider why voters would care about deficits in the first place. Consider the list of economic matters that people typically care about: unemployment, inflation, and economic growth. Each of those variables directly affects the lives of voters, giving them a direct personal stake in how the political system responds to (or fails to deal with) unfavorable changes in any of those variables.

An increase in unemployment means that millions of voters have lost their sources of income, while even more worry that they might be next. Inflation, which is a broad increase in prices, represents a decrease in the buying power of people's incomes. It turns out that a healthy economy would not have a zero-percent rate of inflation (the Federal Reserve's target rate is two percent annually), and balanced inflation results in higher wages as well as higher prices. Still, it makes sense that the average person could become alarmed by persistent increases in the prices of the things that he or she buys.

Economic growth is a bit more abstract as a concern for voters, but there is not much of a logical leap from low growth to lost jobs and lower incomes. Even more specific policy concerns, such as questions about the financial soundness of Social Security, rather easily fall into the category of issues in which most voters have (or will have) a direct personal interest.

Federal budget deficits, by contrast, would seem to be an unlikely source of voter angst -- for two main reasons: First, the two ways to increase deficits -- tax cuts and spending increases -- both put money directly into voters' pockets. Second, the supposed harms of budget deficits are rather abstract and unlikely. Telling voters, for example, that the financial markets might not like it if the government borrows too much money, is simply not the kind of blistering sound bite that usually feeds electoral politics.

It is, therefore, possible to view the public's condemnation of deficits as a salutary development in our political culture. Whereas it used to be possible, in the early years of the Republic, to put out a few barrels of beer and get the yokels drunk enough to vote a man into office, we have grown up as a nation. Maybe we are now, as a polity, finally able to go beyond immediate gratification. Politicians' inability to buy off voters by promising ever more goodies, at no cost to taxpayers, simply must be a sign of social maturity -- or so one might think.

What Is Wrong With Deficits? What We Do -- and Do Not -- Know

As appealing as it might be to think that the public's rejection of budget deficits reflects its concerns with intangible, long-term problems, the reality is, in different respects, both more complicated and much simpler. The problems usually associated with deficits are not, even to economists, as easy to prove as we often like to imagine. And the public almost certainly does not ultimately care how it all works. In difficult times, the public only cares about finding someone or something to blame.

What do economists know about deficits? Broadly speaking, there are only two things related to government borrowing on which the vast majority of economists can agree: First, budget deficits change the composition (and sometimes the amount) of the nation's output. If the economy is weak, deficit spending can put people to work who would otherwise not be working at all, increasing overall economic production. If the economy is healthy, deficit spending will change what is produced in the economy.

It is not necessarily a bad thing, however, for the government to change the output of the economy. If, for example, the deficit were to go up due to increased spending to improve the safety and efficiency of water and sewer systems, and the deficit-induced increases in borrowing costs were to result in the construction of fewer exurban strip malls, the economy would be healthier in both the short run and the long run. Economists and politicians who stress the downside of deficits, however, focus on the possibility of a wasteful government-spending program's displacing an entrepreneur's efforts to create new businesses and jobs.

Simply assuming that deficits always harm -- and never help -- the economy, is thus both mindless and empirically baseless. Knee-jerk assertions that deficits always harm the economy (even in the long-run) are gross distortions of reality.

The second thing that we know about budget deficits is that they can be too big for too long. A government either has to collect enough money currently to make its budget sustainable in the long-term, or it has to convince its lenders that it will do so at some point in the future. Worries that the U.S. government will face a financial crisis are based on this idea.

Economists, however, really have no idea when or how such a crisis might come about. One government might find that it literally must balance its budget every year, because financiers simply will not lend it money. On the other hand, a different government might face decades of growing debt, yet its creditors could happily continue to lend it money, in the belief that the long-term borrowing picture will ultimately be brought back into a sustainable posture.

Again, however, we do not really know when a situation will turn for the worse (or the better). One response to such uncertainty would be to adopt a completely risk-averse budget policy, refusing ever to borrow money. Doing so (in both the U.S. and elsewhere), however, would require cutbacks that would devastate the economy for years to come. It would also force the government to forgo borrowing even for the most virtuous categories of spending, such as supporting research to fight deadly diseases.

Although the analogy between government finances and household finances is often overstated, it is worth noting that no competent financial advisor would ever tell a family that borrowing is per se a bad financial decision. It is always important to allow families, business, and governments to borrow money in appropriate situations.

The Real Reason for Deficit Hysteria: Explaining Unexplained Problems by Blaming Mysterious Forces

Given that the state of economic knowledge is such that we cannot condemn deficit spending categorically, nor can we estimate the limits of governments' ability to borrow -- nor can we even say that deficits cannot be affirmatively good for the economy, in many situations -- it would be truly odd if the public's apparent dislike of budget deficits were to be based on a degree of enlightenment heretofore unseen in our political system. The public cannot knowledgeably reject deficit spending, because even the experts cannot credibly do so.

Instead, it is much more likely that the deficit simply stands in for something that the public does not understand. In the Thirties, people wanted to shoot the bankers who foreclosed on their houses, only to learn that there would be another representative from the bank to replace the first one. When the world is filled with unseen forces, and people's lives are falling apart, politicians often succeed by simply giving the public something to hate.

In this election, voters were told to fear immigrants, Muslims, homosexuals, government workers, and so on. For those who found such scapegoating of entire groups of people unpalatable, the deficit was a perfect substitute. Everyone talks about it as a bad thing; it seems somehow immoral and irresponsible; and it is easy to discuss it in vague generalities. In short, it is a perfect focus of blame.

It would, however, be a mistake to think that the public really wants politicians to attack the deficit. It is nearly impossible, for example, to imagine the public rewarding politicians who presided over a shrinking economy with rising unemployment, even if the deficit were falling.

The Lessons for President Obama and His Supporters

Given that anti-deficit hysteria has become so intense, it would be surprising indeed if President Obama did not at least say something about reducing future deficits. Even so, it would be an enormous mistake for the president (or anyone else who wishes to win an election at any point in the future) to respond to this election by becoming a born-again deficit hawk.

It would be especially bad politics and policy to propose policy changes in areas that are not part of the real problem. As I have argued in some earlier FindLaw columns (the most recent one is available here), Social Security is fundamentally healthy and should not be the target of cuts. Recent increases in the deficit were caused by tax cuts that excessively benefited the wealthy, by the costs of fighting two wars, and by growing health-care costs. The picture going forward is dominated entirely by rising health-care costs. That (as well as allowing the tax cuts for the wealthy to expire) is where the difficult political decisions must be made.

It is gratifying when politicians talk about compromise and promise to look for "responsible" policies to address future problems. It would be unwise, however, to misread the public's fearful rejection of the vague notion of "too much borrowing and spending" to justify cuts in economically-important -- and politically-popular -- programs. Neither future historians nor future voters will look kindly upon those who would embrace such self-defeating policies.

Neil H. Buchanan, J.D. Ph. D. (economics), is a Visiting Scholar at Cornell Law School, an Associate Professor at The George Washington University Law School, and a former economics professor.

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