Is There a Case to be Made for Budget Deficits?

October 27, 2016 by David Dehlendorf


Entitlements: bad, right? Social Security and Medicare: good, correct? Actually, they are the same thing. Most of what makes up entitlements, the word so disparagingly used by Republicans, is Social Security and Medicare. The framing of it dictates one’s reaction. Here’s another one. Deficit: bad, right? Yes, when you are talking about individual people and families. But when you are talking about government spending, our economy does better when we have a bigger deficit. The following article explains this all very well.

We’re Not Helping Our Kids by Keeping the Deficit Down

Janine Jackson of FAIR interviewed Dean Baker about the debt boogeyman for the October 21, 2016 episode of CounterSpin. This is a lightly edited transcript.


Janine Jackson: The announcement that one agenda item for the final presidential debate would be “debt and entitlements” was not surprising. “Debt and entitlements,” linked together that way, are always on corporate media’s agenda, but though the terms are tossed around a lot, they’re rarely unpacked or explained. In place of facts, we get fear. The Chicago Tribune said if they could inject one debate question, it would be: “Secretary Clinton, Mr. Trump, you have children. Why aren’t you scared?”

Well, Americans face many serious challenges. Are runaway national “debt and entitlements” one of them? We’re joined now by Dean Baker, co-director of the Center for Economic and Policy Research, where you’ll find his blog, Beat the Press, and he’s the author of, most recently, Rigged: How Globalization and the Rules of the Modern Economy Were Structured to Make the Rich Richer. Welcome back to CounterSpin, Dean Baker.

Dean Baker: Thanks a lot for having me on.

JJ: I believe I have been asking you to break down media confusion on this issue for at least a decade now. It’s clearly a very useful confusion for some people, and it’s persistent. First of all, the word “entitlement,” if we can start with that—at this point it’s basically a pejorative, and almost a thought-stopper. What are people really talking about when they talk about “entitlements,” or specifically about “cutting runaway entitlements”?

DB: Yeah. The use of the word itself, as you say, is a pejorative, and I gather most of the people using it know that it’s not actually a pejorative. It’s to avoid saying “Social Security and Medicare.” That’s long and short. Because those are the bulk of the items that fill that entitlement category.

Entitlements is a budget term. Budget wonks in Washington all know what it is, and probably are being very neutral when they use it. But when the larger public hears that, and certainly when you’re talking about a national debate of the presidential candidates, that is a large public audience, and they’re not mostly budget wonks. They’re thinking “entitlements,” you know, someone’s getting something for nothing; they’re not thinking Social Security and Medicare.

So if you just rephrased all this—oh, Social Security and Medicare, are you going to cut those?—odds are you get a much different reaction, because these are hugely popular programs across the political spectrum. Republicans support these programs pretty much in the same numbers as Democrats. So you’d have a very different debate if everyone understood they’re asking about cutting Social Security and Medicare.

JJ: Absolutely. I mean, Social Security is paying benefits now to tens of millions of people, of seniors, of people with disabilities, and, I understand, one in ten American children. So it’s clearly a very different conversation if you talk about it in those terms, although, of course, there’s a whole set of fear-mongering around Social Security itself.

I cited that Chicago Tribune editorial, but you really can open any paper on a given day and find a piece saying, our national debt is outrageous, who will think of the children, you know. Now, I understand, there’s new data that is being read as supporting that idea. What’s going on here with the deep concerns? I really have heard, we’re headed toward doom in terms of national debt. What are they talking about?

DB: Well, you know, the implication is that somehow there’s this explosive debt that’s just going to be this massive burden on our kids. And you could beat this up any number of different ways, and I and others have. Most immediately, the debt does impose some burden, that we have to pay interest on the debt, so every year a certain amount of money has to go to pay interest, rather than paying for programs like Medicare or education, other things that we might value.

And the reality is that the money we’re paying in interest is actually very low today; it’s about 8/10ths of a percent of GDP. It comes to around $150 billion a year. Now, it sounds like a lot of money, but if you go back to the early ’90s, we were paying over 3 percent of GDP in interest. That would be on the order of $550 billion a year. So we’re actually paying much less interest today, the reason simply being that we have very low interest rates in the economy. So debt’s not a burden that way.

The other point, if we go for the classic economic story, a large deficit is supposed to crowd out private investment by pushing up interest rates. So the story would be, if we have a real high deficit, we’re going to have high interest rates, and then we won’t have investment. And that’s going to be bad for our kids, because instead of businesses investing, becoming more productive, we’re spending all our money on Social Security and Medicare, they’d say. So good for the people on Social Security and Medicare, but our kids will be poorer because of that.

Well, A—interest rates are actually extremely low today, so they’re lower than anyone expected them to be. So clearly that’s not the obstacle.

The other point, and I and others—I mean, even the International Monetary Fund makes this point—we’ve actually been restrained in our growth because the deficits have not been large enough. Ever since the collapse of the housing bubble, 2007–2008, we’ve been operating well below our potential level of output. And the significance of that is that when the economy is weaker, firms invest less.

So when we’re concerned about this investment story, we actually should want a larger deficit, both because the deficit can directly increase investment—we build up our infrastructure, we improve education, which also increases productivity—but also by spending more, we could crowd private investment in. So the economy’s actually considerably smaller today because we haven’t been running large deficits than was projected ten years ago. So we’re not helping our kids by keeping the deficit down. It doesn’t make any sense.

JJ: And I think part of the problem there has to do with the recourse to a personal analog: You don’t want to be in debt, that’s bad for you, right, for your household income, or something like that. And that’s not really a—of course, if you’re paying money to go to school, then it might make sense to have some debt as an individual. But it’s just not a useful analog, and it’s one that politicians and pundits often seem to take recourse in.

DB: Yeah, they jump to that all the time. And it’s understandable from the standpoint of a politician, because most people aren’t thinking about the economy and how big the government is and its role in the economy. So we all understand we can’t keep adding a thousand dollars to our credit card debt every month; we can get in trouble at some point if we do that. And you go, OK, well, the government’s like that.

Well, the government’s not like that. First of all, the government, at least we don’t expect it to die, so basically the story is that it should be there pretty much forever. I make the analogy, at least, let’s think of a corporation, you know, General Electric. If the CEO of General Electric went to his board and said, oh, we didn’t make any money last year, but we paid off our debt, they would look at him like he’s nuts.They want to make a profit, they don’t care about the debt.

The point being that General Electric expects to be around forever. Maybe they won’t be, but they’re acting as though they do. And certainly the government has reason to believe it will be around forever, so we don’t have to pay off the debt. So that’s one part.

But the other part is that the government has responsibility for supporting the economy. No one in their right mind should think, oh, I’d better spend another hundred dollars this month, because otherwise — we as individuals can’t influence the economy. The government can, and when there’s not enough demand in the economy, the government absolutely has the responsibility to run large deficits, because it has to make up for the shortfall in demand elsewhere. And that’s why these deficits that we’ve been running have been good, and they would be better if they were larger.

JJ: There’s confusion and misinformation around the debt and also around “entitlements.” But then there’s a third thing that happens, which is that “debt and entitlements” becomes a phrase. What’s the problem with making that linkage?

DB: First off, I mentioned Social Security and Medicare being the major ones. Social Security actually, as a practical matter, can’t contribute to the debt, at least under law as it’s now written, because the way the law is written, Social Security can only spend money that’s in the trust fund. So that’s the designated Social Security tax, and savings from past taxes, they can spend that. But if they ever exceed that, the program has to cut back its spending. So the only way Social Security could ever spend more money than it takes in is if Congress were to change the law. So the idea it’s runaway, no, Congress would actually have to change the law for it to be runaway. It can’t possibly run away.

In terms of Medicare, I guess I’d make two points here. One is that the rise in Medicare costs is driven by the overall rise in healthcare costs. It’s not like we uniquely have a problem with Medicare being out of control; it’s healthcare costs in the US are out of control. And Medicare, of course, pays for healthcare in the private sector; it’s not its own healthcare program that way.

But the other point that there’s too little recognition of: Actually, the finances of Medicare have improved hugely under the Obama administration. You could decide how much credit you want to give him for that, but the shortfall in the program, projected shortfall, was over 3-and-a-half percentage points of payroll back in 2009 when he first took office. Today it’s just over 7/10ths of a percentage point. So the shortfall has declined by 80 percent.

So the idea, somehow, these programs are just spending crazily and they’re going to bankrupt us, A, with Social Security, it’s literally not possible unless Congress changes the law, and in the case of Medicare, we actually have a program that’s in much, much better financial shape today, at least by our understanding of it, than it was just eight years ago. So what’s the problem here?

JJ: Finally, I think folks think that we’re looking at Social Security and Medicare because somehow that is, no matter how we feel about it, it’s still a source of a drain, or something like that. And it has to do with what we are able to see, even in the budget. You’ve written about other things that, if we’re looking for things that involve a commitment of resources that perhaps future generations should be concerned about, there are other things we could be thinking about, but we’re kind of discouraged from doing so.

DB: Yeah. Again, at the end of the day, if we’re talking about a generational issue, we’re handing people a whole economy. So on the one hand, one of the things I mentioned in that piece was we have military commitments. Again, we could back away from them, but those, as we know, are hard to do. It’s not a question of what you or I want, it’s what’s going to be politically viable. So we’re spending a lot of money in Iraq and Afghanistan because 15 years ago, we made a commitment to go to war there, and we’re still spending a lot of money on that.

Other areas—and I raise this, and people look at me kind of blank-faced; I’ll try to make it as simple as possible—patent monopolies are a way in which the government pays for things. So we give companies a patent monopoly, and that’s ostensibly how we’re paying for medical research. So we’re saying, we want Pfizer to research new drugs, you develop a new drug and we’re going to let you charge monopoly prices. That’s, in effect, a tax. So we don’t look at that? I don’t know what economic model says we’re supposed to ignore it, because Pfizer in effect is taxing the American people, rather than the government. I mean, it has the same impact.

And those are very large. In the case of just prescription drugs alone, the patent tax, if you like, some of them are on the order of $350 billion a year, about 2 percent of GDP. It’s a huge amount of money. And, of course, we have it in other areas: software, medical equipment, any number of other areas where it’s a very big portion in the price of the products. So to pretend that somehow the deficit or debt is going to be bankrupting our kids, and not look at all these other ways that we’re imposing burdens on them with our actions today….

I’d really be remiss in not mentioning global warming. Again, somehow let’s imagine, 20 years out, we could tell our kids, hey, we paid down the debt, and then we’ve destroyed the environment. We go, oh, you should thank us. I mean, obviously they should spit in our face. You know, we hand them a whole economy, a whole society, and, for that matter, the natural environment, and acting like somehow we’re measuring generational equity by the size of the debt is pretty silly.

JJ: We’ve been speaking with Dean Baker, co-director of the Center for Economic and Policy Research. You can find his blog Beat the Press at their website,, and also you can find his book there, Rigged: How Globalization and the Rules of the Modern Economy Were Structured to Make the Rich Richer. Dean Baker, thank you for joining us this week on CounterSpin.

DB: Thanks a lot, Janine.

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