Too soon to worry about deficits: Opposing view

On Tuesday, the White House will unveil its annual federal budget. In recent years, the traditional hand-wringing over budget deficits sensibly took a back seat to ensuring that spending cuts did not drag on the still-incomplete economic recovery.

Now, however, pressure is building again to reduce deficits. There’s still little economic evidence, however, that we should start cutting spending to reduce the deficit.

In the near term, with interest rates and inflation both ultra-low, it’s clear that the primary problem in the economy remains insufficient demand, which keeps labor markets weak and wage growth slow. Rapid deficit reduction through spending cuts would exacerbate this and further stall a full economic recovery.

Worse, this demand shortfall could become chronic and long-lived. Fiscal policy should provide support for economic growth until rising interest rates and inflation actually appear in the data. Before then, calls for restraining spending lack an economic rationale.

Another argument against steep spending cuts is the need for public investment. Productivity growth has steadily decelerated over the recovery, partly due to weak business investment, even with historically low interest rates and high profits. If the private sector won’t make productive investments even when they’re cheap, the public sector should. Infrastructure upgrades, energy efficiency and large investments in early childhood could yield large and lasting returns.

Only when the economy achieves a full recovery should our focus shift to the national debt. But even then, the destructive toll of inequality on lower- and middle-class income households argues that essential social insurance programs such as Social Security and Medicare should be maintained and expanded, not slashed. And the first new revenue to fund these vital programs should be progressive.

The biggest problems we face remain a still-weak economy and destructive inequality, not a too-large federal budget deficit.

Hunter Blair is budget analyst for the Economic Policy Institute, and Josh Bivens is the organization’s research and policy director.