A World Upside Down? Deficit Fantasies in the Great Recession - from The Roosevelt Institute

[Bill USA]

http://www.nextnewdeal.net/sites/default/files/wp-content/uploads/2010/12/a-world-upside-down

Thomas Ferguson, Ph.D., Robert Johnson, Ph.D.

Abstract

This paper analyzes the arguments and evidence in current debates about the government budget deficit.
We critically examine claims put forward by Rinehart and Rogoff, the International Monetary Fund, and others
about the dangers of rising debt to GDP ratios. We also scrutinize assertions by Alesina and Ardagno that cutting
deficits is likely to be stimulatory.

Our analysis of the U.S. budget outlook leads to surprising conclusions. We highlight the unheralded acknowledgement by the Congressional Budget Office in August, 2010, that financial assets held by the government should be netted out of U.S. debt calculations. This step takes the US further away from any hypothetical danger zone and should be a yellow flag to shrill warnings of danger from U.S. deficits.

Our analysis of threats to the budget finds that not entitlement spending or Social Security, but the
excessive costs of oligopoly in health care and defense spending play a large role in current concerns. So does
the contingent liability of another financial crisis. In an era of unbridled money politics, concentrated interests
in the military, financial, and medical industries pose much more significant dangers to U.S. public finances
than concerns about overreach from broad based popular programs like" Social Security, which is itself in
good shape for as many years as one can make credible forecasts.

The paper also examines two hypothetical scenarios: One involving a growth inducing public investment program and another, more pessimistic scenario in which underemployment equilibrium is allowed to persist for several years." From those
scenarios we conclude that the risk to U.S. public finances, as measured by the debt/GDP ratio in 2020, is
much greater on a trajectory"of austerity than from any risk incurred by the very low public cost of"borrowing to
spur investment in infrastructure, education, and science that would generate large social and private gains in
productivity.