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Posted at 10:20 AM ET, 02/ 3/2011

The liberal case for cutting domestic spending

By Derek Thompson

I'm a progressive deficit hawk. This is a good reason to be lonely and depressed. Lonely, because some progressives think the term deficit hawk is a pejorative, and many deficit hawks think progressives aren't serious. Depressed, because I have twice the cause to feel exasperated by Washington budget policy. First, Congress lacks the appetite for high-impact spending programs today. Second, it lacks the will to cut the deficit tomorrow.

What some people don't see, however, is how these ideas can exist simultaneously. Deficit-neutral stimulus is possible.

Progressives want new spending for education, innovation and infrastructure. But under the Republican House's cut-go rules, new spending must be offset with spending cuts. That leaves the stimulus crowd with two options: (1) identify low-impact policies to cut and shift the money toward better ideas, like an infrastructure bank, export financing or community college support; or (2) stimulate the economy in ways that cost next to nothing.

You don't see many liberal economists writing about the best places to cut domestic spending in the next few years. But maybe they should be -- if only for the selfish reason that it might clear the way for their spending ideas. When I asked Adam Hersh, an economist from the Center for American Progress, to identify some non-security discretionary items he could part with in exchange for infrastructure money, he acknowledged that the pickings might be slim. But there are still pickings.

"You could shift spending from activities with low stimulating multipliers to higher job multipliers -- like shifting timber subsidies toward infrastructure and R&D," Hersh said. Cut farm subsidies, eliminate duplicate and wasteful domestic programs, and throw in the president's promise to freeze non-security discretionary spending and federal wages, and you've got tens of billions of dollars that could offset spending projects under the conservative House's cut-go rules. Who knows if this would lure Republicans across the aisle. But what's the harm in identifying cuts that would make important initiatives more palatable to moderates?

The second option is to pursue stimulating policies that cost basically nothing. Under this category, you could enact deficit-neutral corporate tax reform; reform the Byzantine rules for export control; increase visas for skilled foreign students; and even announce cash prizes for innovation breakthroughs that won't cost Washington a cent, unless companies really crack the code on photovoltaic efficiency, or whatever sweepstakes we want to set up. All of these measures would make the U.S. economy more productive (sorry, competitive), and you could have all of them and more for a bargain.

Derek Thompson is an associate editor at the Atlantic, where he writes about economics, business and technology.

By Derek Thompson  | February 3, 2011; 10:20 AM ET
 
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Comments

Yep, this is why I have suggested a full repeal of Lyndon Johnson's deficit monster Medicaid program.

Posted by: krazen1211 | February 3, 2011 10:36 AM | Report abuse

I've stated here many times I want the budget balanced.

So join the club Ezra. You're not the first liberal to be in this club. And BTW, there are no Republicans in this club at all.

The best way to end our foreign adventures, and to cut the defense budget, and to start cutting corruption here at home is by balancing the budget.

I am also for a strong defense, but our current defense budget just throws away $100s billions that could be better spent on such things as moon&mars bases, next generation launchers, space based anti-missile systems, asteroid tracking and defense, and other space-based projects. America's future is in outer space and instead we are just wasting trillions trying to bomb other people into submission. These are the kinds of investments that truly lead to significant innovation, jobs, and futures.

Posted by: lauren2010 | February 3, 2011 10:46 AM | Report abuse

Not entirely sure I see a difference between "eliminating subsidies" and "raising taxes".

On the 'export control' topic, I'm curious if more discussion about this could be given. It would seem directly in line with Obama's claimed interest in increasing our export competitiveness, and may be able to get bipartisan support. Why, besides national security reasons, do we regulate exports at all?

On the topic of Medicaid / jobs, we can reasonably divide government spending into four loose categories:

(1) Useful spending that also happens to create jobs

(2) Wasteful spending that also happens to create jobs

(3) Useful spending that does not create jobs

(4) Wasteful spending that does not create jobs

I think the left would put Medicaid in category (1), and the right would put it in (2). Much defense spending would tend to get the exact opposite politically based categorization. I'd argue that we should first consider what could reasonably be put in bin (4) though.

Posted by: eggnogfool | February 3, 2011 10:58 AM | Report abuse

Terrible, just terrible. You and Ezra, despite what Jamie Galbraith tried to explain to him, still don't understand the sectoral balances that make domestic deficits imperative.
Government deficit (surplus)=private sector surplus (deficit)
by definition!
Balanced budgets mean removal of financial assets from the private sector, which then needs to turn to indebtedness.
Really, start reading Randall Wray, Warren Mosler, Bill Mitchell and wrap your head around fiat currency regimes such as ours. We are not on a gold standard anymore!
Start with
http://www.levyinstitute.org/pubs/ppb_111.pdf
then move to
http://moslereconomics.com/wp-content/powerpoints/7DIF.pdf

Posted by: pdrub | February 3, 2011 11:45 AM | Report abuse

"Who knows if this would lure Republicans across the aisle."

I know.

The answer is "no."

Posted by: TomServo | February 3, 2011 11:55 AM | Report abuse

Derek Thompson kills it in his first post

@Chris_Gaun
chrisgaun@gmail.com

Posted by: chrisgaun | February 3, 2011 11:59 AM | Report abuse

Cut-go only applies to mandatory spending, not discretionary, just so you know. Therefore, farm subsidies are the only thing you listed that works as a potential offset for new mandatory spending.

That being said, given the current political climate, that's the best Democrats can really hope for within discretionary spending too. But you can't count savings from the non-security discretionary freeze and "eliminat[ing] duplicate and wasteful domestic programs" and freezing federal wages. The non-security freeze is a top-line freeze, and discretionary spending cuts of any nature are how you live within said freeze.

Posted by: ldavidadler | February 3, 2011 12:47 PM | Report abuse

You've made a typical liberal error:

that the modern GOP will accept your sacrifice in good faith and will somehow reward that with a sacrifice of their own.

The reason liberals don't get into specifying places to cut other than oil/farm subsidies is because it inherently validates the rightwing view that spending is an issue.

It's not. We have the lowest level of taxation since the 1950's. We have one of the most efficient governments in the world when it comes to the level of services it supplies for the amount of revenue it takes in.

The wealthiest few capture almost half of the entire economic benefit of the US economy. Therefore, it is immoral NOT to demand that they pay their fair share and support those for the economic benefit does NOT trickle down.

I think it's really funny that a nation that calls itself 80% christian is the stingiest and most protective of the money changers that Jesus threw out of the temples. How you treat the least of society is how you treat Jesus?

Koch brothers better start working on finding a way to fit a camel through the eye of a needle.

Posted by: dplionis | February 3, 2011 12:49 PM | Report abuse

Let me play out that discussion:

Dem: In an effort to respect your position and seek bipartisan compromise, I think I have found some places in the federal budget where we can make some cuts.

GOP: Great. Hold on one sec.

GOP then picks up and moves the goalposts.

Dem: Wait, where are you going?

GOP: I really wish you would be bipartisan and come meet me on my side, you muslim/socialist/fascist/commie.

National Media: Yeah, Democrats. Why haven't taken any steps to be bipartisan with the GOP?

It's basically the 3-card monte. You're an idiot if get suckered into thinking you can win by their rules. Just walk away and don't play their game.

Posted by: dplionis | February 3, 2011 12:58 PM | Report abuse

"that the modern GOP will accept your sacrifice in good faith and will somehow reward that with a sacrifice of their own.'

100% true.

But the odd thing is, the very thing the neocons want will also cause them much unintentional sacrifice.

As I said earlier, a balanced budget will ensure a stop to our wars and will help tame corruption in the US gvmt.

We can not practice keynesian policies with so much corruption and war going on. We must first tame this beast and make it more efficient and HUNGRY for investment.

I am ordinarily a keynesian, but Katrina and the bailouts and the stimulus' have all taught us that too much of this money just goes to the already wealthy and not where it should.

Posted by: lauren2010 | February 3, 2011 12:59 PM | Report abuse

"increase visas for skilled foreign students"

...Just means that many less of our own students who will have a job waiting for them when they graduate. We need less visas, and more support for our own students.

Posted by: SBGYPSY | February 3, 2011 2:13 PM | Report abuse

dpliones wrote, "It's not. We have the lowest level of taxation since the 1950's."

This is correct; tax receipts are currently running at around 15% of GDP.

Also, corporate tax receipts are at 2% of GDP, and they've come down steadily from 6% in the 1950s.

And the total tax burden (federal, state, local) at under 27% in the US is the fourth lowest in the developed world, just behind South Korea (in first and second place are those economic powerhouses Mexico and Turkey).

The bottom line: our taxes are very low compared with how much we spend, compared with the rest of the world, and compared with our own history. Any talk of further tax cuts is the height of irresponsibility.

But with cut-go, there are no spending increases without spending cuts to balance, but tax cuts need not be compensated. So we should be seeing a lot of new tax credits coming online to further reduce our already low tax revenues. Too bad.

Posted by: suehall | February 3, 2011 2:32 PM | Report abuse

With all due respect, being a wonk in favor of cutting farm subsidies is like being a political candidate in favor of good jobs. Wonks, some of them prominent elected officials, having been saying that for decades and getting nowhere in the face of the Senate. If you aren't offering a political roadmap for cutting them, you'd really be better off not mentioning them. Makes you sound content to mouth truisms, as opposed to saying something that might make a difference.

Posted by: SamPenrose | February 3, 2011 4:16 PM | Report abuse

I used to be a liberal deficit hawk. I supported Clinton's approach of increasing taxes and cutting spending to eliminate the deficit, and thought it was succeeding. I was wrong.

Clinton balanced the budget for one year (if you exclude off budget items such as Social Security). Then the Republicans won an election, and the balanced budget was history.

If anyone can suggest a politically viable strategy for balancing the budget over the long term, I might again call myself a liberal budget hawk. But I have no desire to emulate Sisyphus, pushing a rock up the hill only to have the Republicans roll it back down.

Posted by: KennethAlmquist | February 3, 2011 4:57 PM | Report abuse

Want to save some money? Stop invading other countries. Stop wasting funds on munitions, which are not providing any genuine return at all. This should save a few bucks, no?

Posted by: box211 | February 3, 2011 5:11 PM | Report abuse

The unemployed (unemployable), especially the 99ers, have every right to believe that the Admin has a sadistic bent to it. We are one complete year into The Great Silence. People who have been getting absolutely nowhere with representation, legislation, support, or even a mention (besides some pithy, obtuse Goolsbee smarm) are faced with combining that vapidity with a scarce market, not even mentioning that we'll never get back to our careers as we knew them.
Stimulate? Get on the business end of an immediate takeover of the UI racket and dispense the insurance we counted if/when the worst thing in our lives occurred. Peg it to the REAL number of unemployed in America vs the rate of unemployment. Set the bar at whatever seems reasonable for this time (*cough* post-recession) and if a state is above that number, the benefits go out. Period.
It can get done and it wouldn't take a brawl in Congress to do because I do know Republicans out of work, careers over, houses gone, and living on the street. And to really put it in political terms, these are millions...millions...of Americans who have voting rights. Neither party wants these votes? The Dems got none of them in Nov because they jilted us too many times in '10.

Posted by: kickoradell | February 3, 2011 5:52 PM | Report abuse

Great post pdbrub. Maybe a little too much truth to lay on a cargo cult all at once. Maybe ease into it next before explaining how airplanes work or where Coca Cola comes from.

"For us, America is very good," said village chief Isaac Wan, 67, the leader of the cargo cult, barefoot but dressed in a smart American naval officer's uniform and sitting under a large US flag... For the last 50 years cultists have clung to the belief that by dressing up as GIs and venerating US symbols they can somehow tempt back the wartime cargo
http://www.telegraph.co.uk/news/worldnews/1542869/Islands-cargo-cult-celebrates-50-years-worshipping-the-US.html

Yes Derek, America is very good, but seriously, you are 180 degrees out of phase with reality. With a trillion dollar output gap, the deficit is only a problem because its too small!

Posted by: beowulf_ | February 3, 2011 8:36 PM | Report abuse

Every single liberal here thus far is a complete deficit peacock. Nobody has proposed anything close to the $450 billion or so annually that could be saved with a full repeal of the Medicaid program.

Posted by: krazen1211 | February 3, 2011 9:17 PM | Report abuse

What is so hard to understand about sectoral balances? Let's review some facts. And by facts I mean things that are true by definition and accounting identities.

1) All net financial assets in the economy come from the government: this means that private sector cannot create net financial assets - every dollar of assets (savings) on the balance sheet of one participant in the private sector is matched exactly by a corresponding liability (debt) in some other participant's balance sheet.
2) By basic accounting identity Government Deficit (Surplus) = Private Sector Surplus (Deficit) where (just for now) we let "private sector" to stand for both domestic and foreign users of currency. This has to be true by definition
3) Thus the only way for both Government and Domestic Private sector to be in surplus is for the Foreign sector to run deficits: something's gotta give. This means that the US must run trade surplus with the rest of the world, but htis is not the case.
4)In the light of the above, advocating for balanced budgets (government surpluses) is exactly identical to advocating for domestic private sector deficits. Which means that the US household and firms and banks etc in aggregate will spend and owe in taxes more than they earn and won't be able to save. This can be desirable in some circumstances. For example, when the economy overheats, the government would want to reduce the private sectors purchasing power to curb inflation and can do so by increasing taxation or reducing injection of net financial assets into the economy (a.k.a "spending"). Why somebody would advocate private sector deficit now, at the time of economic depression and under-utilization, is beyond me.

Posted by: pdrub | February 3, 2011 9:38 PM | Report abuse

It is PATHETIC seeing government workers PEGGED as the reason for economic troubles

We are trillions in debt and BILLIONS over for many programs yet we are freezing salaries for hardworking, generally-underpaid workers which save PENNIES compared to the big picture

It is done strictly to look "cool" to GOP'ers

Pathetic

Posted by: Bious | February 3, 2011 9:38 PM | Report abuse

"I think the left would put Medicaid in category (1), and the right would put it in (2). Much defense spending would tend to get the exact opposite politically based categorization. I'd argue that we should first consider what could reasonably be put in bin (4) though."

Medicaid is the king of #4 spending.

http://www.ppinys.org/reports/medicd99.htm

How New York State's runaway Medicaid spending is strangling the taxpayers and undercutting the quality of medical care

Posted by: krazen1211 | February 3, 2011 9:47 PM | Report abuse

Not realistic.

Republicans will never agree to anything that will help the economy unless there's so much public support for it, and understanding of it, that they can't get away with not doing it. They want the economy as bad as possible in 2012 because that will greatly increase their odds of success in those elections.

Next, almost everyone wants to end ginormous farm subsidies, but when you give farm voters many times the votes of non-farm, with our perfect unimprovable democracy (yes, Wyoming voters should get 70 times the votes in the Senate per person that California voters get), and when giant agribusiness shells out giant bribes, it's not going to happen anytime soon. Especially with our new supermajority requirement for almost everything in the senate.

Posted by: RichardHSerlin | February 4, 2011 12:57 AM | Report abuse

Republicans will never support cuts to subsidies for parochial interests. Out of all the non security discretionary spending, that will be last to go.

But as far as I'm concerned, the Democrats shouldn't cut a damned thing unless the Republicans agree to some military spending cuts. All of the easy money is military. We're still building and maintaining tons of cold war era weapons that essentially useless today.

Posted by: zosima | February 4, 2011 2:17 AM | Report abuse

"And the total tax burden (federal, state, local) at under 27% in the US is the fourth lowest in the developed world, just behind South Korea (in first and second place are those economic powerhouses Mexico and Turkey)."

And Japan must be fifth-lowest in whatever year you were looking at: The US, South Korea and Japan are usually all but tied for spots three, four, and five.

The Japanese present an interesting mythology that conservatives, and even many liberals, have fallen for. I often here people say that the Japanese experience proves you can't spend your way out of a long slump. But in fact, Japanese government spending is very normal by international standards. What is abnormal is its very low tax rates. I am not sure which is worse: that conservatives somehow turn an example that tax cuts don't work into an myth that spending doesn't, or that many liberals fall for it.

Posted by: brickcha | February 4, 2011 6:39 AM | Report abuse

"increase visas for skilled foreign students"

Am I the only person who thinks it somewhat immoral for the richest country to let poorer countries pick up the tab for educating people to a high level, and then lure those people here for our benefit?

Posted by: quickj | February 4, 2011 6:00 PM | Report abuse

I read this looking for the liberal case to cut domestic spending.

I didn't find anything more than "I am a liberal deficit hawk".

Is that a "case" or an "argument"?

zzzzzzzzzzzz

Posted by: Amphigory | February 4, 2011 9:26 PM | Report abuse

Suppose that the Republicans had adopted a ConserviGo rule, stating that all legislation must be based on ideas originating from conservative think tanks. Would Derek Thompson argue that liberal theorists should respond by scouring the output of conservative think tanks in hopes of finding a few good ideas, or at least some that aren't too aweful?

There is nothing wrong with compromising with Republicans in order to get a bill through Congress. But there are a few points to consider.

First, when you develop policy proposals, you want to try to find find policies that are politically viable but you don't want to make unilateral concessions to Republicans before negotiations start. It seems to me that worrying about whether something fits into CutGo is more like the latter than the former.

Second, to figure out where Republicans are willing to compromise, you have to look at a lot more than the rules. If Democrats decide to offer the Republicans something that the Republicans really want (such as making the tax cuts for the top 1% permanent), it won't make any difference whether what the Democrats ask in return is consistent with CutGo. If Republicans agree to the deal, they will provide the votes to waive the CutGo requirement. Conversely, since Republicans have a majority in the House, you aren't going to get anything through unless some Republicans are willing to vote for it. The individual mandate was endorsed by the Heritage Foundation, and thus meets the requirements of my hypothetical ConserviGo rule, but that doesn't mean you would have a chance of getting the Affordable Care Act through the House today.

Third, the Republicans aren't eager to deal right now, so the payoff from figuring out how to get stuff through the House is likely to be small. The best bet for moving our country forward is to appeal to the American voter, not Republican Congressmen.

Posted by: KennethAlmquist | February 5, 2011 4:28 PM | Report abuse

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