The United States' most significant economic problem is mass unemployment, not its current deficit or its long-term debt. This is something that both mainstream economists and the general public overwhelmingly agree upon. And yet, for more than a year now, talk about deficits has dominated our politics. President Obama is belatedly trying to shift the focus back to unemployment, and creating jobs to bring unemployment down.
But the focus on deficits has become so obsessive it's impossible to really move on without putting them into context. Surprisingly, one way to do that is simply to go all in, and look at everything in terms of deficits - up to and including our deficit of jobs that pay enough to live on. I'm writing as an American, writing about America. But, the principles involved here are universal - not just because the US has such a powerful influence on the rest of the world economy, but because ultimately all societies must deal with meeting similar needs.
In this accounting, there are five kinds of deficits: financial, physical, structural/functional, cognitive and political. I will deal with the first kind here in Part 1, but the others - though more difficult to quantify - are equally important for the national well-being, and ultimately, even our survival.
Because of the US' particular political structure, its federal, state and local deficits must be considered separately, each involving a distinctly different logic. However, the federal deficit must be further sub-divided into short-, medium- and long-term deficits, because each is similarly governed by a distinctively different logic, as I will soon explain.
The confusion of these three logics is central to the political chaos and confusion that we have been suffering through these last few years, as conservative Republicans use the recession-fueled explosion in short-term deficits to argue for massive cuts in long-term spending on some of the most popular and effective government programs there are - including Social Security and Medicare.
Short-term federal deficit is due to recession
Although the United States was running a disturbing annual federal deficit throughout virtually all of George W Bush's presidency - Nobel Prize-winning economist George Akerlof once called Bush's budget policies "a form of looting" - that deficit exploded dramatically in the fourth quarter of 2008.
The reason was quite straightforward: the economic slowdown that had been creeping up on us since the housing market peaked intensified dramatically with the Wall Street financial crisis. Recessions routinely produce a two-fold budget dynamic when this happens.
The economic crisis that began in 2008 has resulted in high unemployment and cuts to public services [GALLO/GETTY]
On the one hand, government revenues fall, because economic activity has fallen. On the other hand, government expenditures rise, because idled workers need government expenditures to survive and because the economy as a whole needs government demand in order to make up for missing private demand. Both shifts were exceptionally large in this recession.
This was a particularly severe form of recession - one based on a massive asset-bubble collapse, not just a temporary drop in demand, as with ordinary recessions. But that doesn't negate the basic logic of how recession causes short-term deficits to explode, and how to recover from them.
It only prolongs, and somewhat complicates the process - unless, of course, politicians get spooked or otherwise act irrationally.
But in the end, short-term government spending will speed recovery, hastening the day when deficits will once again fall, and eventually allow accumulated debt to be gradually reduced - if not in absolute terms, then at least as a proportion of the national income. This is known as the debt-to-GDP ratio. As long as it falls over time - or at the very least, remains steady - short-term deficits aren't really a problem for sovereign governments with their own currency, like the United States.
We can see that from our history: The debt-to-GDP ratio fell almost without exception every year from World War II (when the ratio was 117.5 per cent) until Ronald Reagan took office (when it was down to 32.5 per cent). That period of bipartisan fiscal responsibility ended when the Republicans adopted the strategy of running what Reagan's budget director David Stockman called "strategic deficits", intended to create long-term budgetary shortfalls to undercut political support for governmental spending. This Republican strategy of intentional deficits has been extremely effective in its own perverse way: The only time the debt-to-GDP ratio has fallen since then was during Clinton's eight years in office. It was 84.2 per cent when George W Bush left office.
After 30 years dominated by strategic deficits, movement conservatives are prepared for their end-game: Using this temporary spike in the short-term deficit to drive hysteria about the long-term deficit - even though very different processes were involved. They are using that hysteria to begin seriously dismantling the welfare state, and Obama is helping them do it, thanks to his obsession over a "grand bargain".
"Concentrated interests in the military, financial, and medical industries pose much more significant dangers to US public finances than concerns about overreach from broad-based popular programs like Social Security."
Economist Robert Johnson and political scientist Thomas Ferguson
Mid-term deficit is due to Bush-era policies
When George W Bush took office in 2001, the Congressional Budget Office was projecting a 10-year surplus of $5.6tn - a figure that plummeted to $1.6 trillion within just one year. It wasn't all real, of course.
By law, CBO projections are based on "current law", even though no one really expects the current law to continue for 10 years into the future. Economic growth rates and other factors tend to throw things off as well - not to mention the inherent difficulty of projecting that far ahead. Still, it's a useful benchmark, if used sensibly to gauge the large-scale direction of things.
That's not how George W Bush used it, of course. Instead, he essentially said, "Here's all this money the government's going to have, it ought to go back to you!" And by "you", Bush meant the wealthiest 1 per cent of all Americans.
What's more, Bush remained committed to the tax cuts, even as a recession set in, reducing the probable size of the surplus, and even when we went to war after 9/11. In fact, he signed a second round of cuts after invading Iraq.
On top of that, lax financial regulations, made even laxer under Bush, significantly increased the eventual cost of the financial collapse. Putting all of Bush's major policy initiatives together with the costs of the recession Bush helped bring about, CBO projections for the next ten years show that our total annual deficits over that period of time are almost exactly equal to the total costs of all those Bush policies and blunders. You can see a graph illustrating this, along with an explanation here.
Long-term deficit is due to oligopolies
Although the mid-term deficit can be attributed to Bush's failed policies, the picture changes once again when we start looking further out. One factor is usually cited above all others - the cost of medical care from Medicare and Medicaid. But actually, that's only part of the picture.
In a December 2010 paper, "A World Upside Down? Deficit Fantasies in the Great Recession", economist Robert Johnson and political scientist Thomas Ferguson demonstrated that the US' long-term deficit was due to monopolistic costs from three different oligopolies: the military-industrial complex, the medical-industrial complex, and the elite financial sector.
They wrote, "In an era of unbridled money politics, concentrated interests in the military, financial, and medical industries pose much more significant dangers to US public finances than concerns about overreach from broad-based popular programs like Social Security."
The US health care system is far more expensive than other countries', even though its outcomes are generally poorer. It's not the government programs in particular that are so expensive, it's the entire US medical system as a whole. If our health care costs followed the projected trajectory of other countries, such as Canada, Germany, and Japan, we'd be looking at long-term surpluses, not deficits.
Similarly, the US military-industrial complex is almost as large as the rest of the world's military spending combined, but does not make the US noticeably more secure than most other nations.
Indeed, vast amounts of our military spending is still directed towards weapons systems designed for enemies that no longer exist. Meanwhile, the wars we are still fighting - in Iraq and Afghanistan - have no coherent relationship to our security goals. They are at least as likely to increase terrorist hostility towards us, for example, as they are to decrease it. A decidedly less hostile, less military approach could conceivably vastly reduce the terrorist threat we face. But our military-industrial complex will not allow for that.
Finally, our over-grown financial sector not only siphons off vast sums of money for materially unproductive uses, it also inevitably produces crises which are extremely costly to clean up.
In sum, controlling these three power special interest sectors is the key to controlling the US' long-term deficit. But the possibility of controlling these sectors is virtually nil considering the state of US politics today.
Because states cannot engage in deficit spending, except through very limited means, the short-term/mid-term/long-term division of time-frames is much less applicable to understanding their deficits. Indeed, states are largely hostage to the overall condition of the economy - and to the political power of special interests, who tend to be much more powerful compared to states than they are compared to the nation as a whole. When a recession hits, states are virtually powerless to fight back unless they get federal assistance. And if they don't get federal assistance, then cuts to state budgets will have anti-stimulative effect, countering the stimulative effect of increased federal spending.
That's why one of the most effective forms of stimulus available to the federal government is simply to help states out during tough economic times - paying a larger portion of the costs of health, education and welfare programmes, for example. When the House increased such spending in the stimulus bill passed in early 2009, Maine's "moderate" Republican Senator Susan Collins led the way in undoing that sensible move - and Barack Obama praised her for it.
Senator Susan Collins watered down a stimulus bill designed to speed economic recovery [GALLO/GETTY]
The results were entirely predictable. Thanks to the stimulus, government spending helped the GDP grow by 1.33 per cent in the second quarter of 2009 - a figure that turned negative in just two quarters, dropping to -0.4 per cent by the first quarter of 2010. But the federal spending portion actually remained positive throughout. It was state and local spending that turned negative after just a single quarter of positive contribution, thanks in large part to Susan Collins slashing tens of billions in state aid from the stimulus programme. Not only are such measures fiscally stupid in the short run, they do significant long-term damage to the states' capacity to meet their people's needs.
The amounts we're talking about are minor in terms of the long-term federal budget, but are overwhelming to the individual states in any given year. For example, during the early 2000s recession and its aftermath, states were forced to cut budgets by $240bn from 2002 to 2005, peaking from $80bn in cuts in 2004.
In comparison, the Center on Budget and Policy Priorities reported $300bn in cuts from 2009 and 2010 and projected $279bn in cuts from 2011 through 2013 - a total of $579bn in cuts, peaking at $191bn in 2010. While such figures represent incredible suffering and destruction of state government infrastructure, the total state shortfalls of both recessions - $819bn - was less than the $979bn the Bush tax cuts gave to the wealthiest 5 per cent from 2001 to 2010, according to calculations by Citizens for Tax Justice.
And 69 per cent of those cuts went to the wealthiest 1 per cent. Meanwhile, monied interests have such a stranglehold on state governments that, according to an analysis by the Institute on Taxation and Economic Policy, the wealthiest 1 per cent pay just over 5 per cent in state and local taxes nationwide, compared to over 11 per cent paid by the poorest 20 per cent.
Although state deficits are the neglected source of tremendous suffering, there is even less attention to what deficits mean at the local level, which are even less able to cope with recessions, especially severe ones.
There is a lot of local reporting as cities and counties cut budgets, employees and services. But the big-picture story of the aggregate national impact rarely registers, and comprehensive data is difficult to obtain. The National League of Cities is one of the few sources of such information beyond labour statistics collected by federal government, which show a loss of 550,000 local government jobs since September 2008.
The picture painted by the NLC is incredibly bleak.
Aggregate revenues nationwide have been down for four straight years - totalling about 8 per cent - compared to just two years during the previous 20 years from 1986 through 2006. While conservatives have long claimed to love local government - "states rights" and local school boards are perennially praised and opposed to "Washington" - the reality is that local governments have suffered severely even while federal spending has increased, thanks in part to the downsising of federal aid, which also means downsising of state aid as well.
This translates directly into people dying for lack of services. A July 2010 NLC report found the situation so dire that 63 per cent of cities and 39 per cent of counties were reporting cuts to key public safety services - police, fire, and emergency - the need for which generally increases during recessions.
Since many more people die from such local security threats, it makes a mockery of conservative breast-beating over the threat of international terrorism.
According to the NLC, in both 2009 and 2010, nearly nine in ten city finance officers reported that their cities were less able to meet fiscal needs than in the previous year. An NLC report from December 2009 projected total general fund shortfalls of $34bn to $53bn from 2010 to 2012, with projected cuts in state aid to cities of $21bn to $30bn, for a total shortfall of $56bn to $83bn.
In its press release, the NLC said, "Local budget cuts could result in 600,000 public and private sector job losses in 2010 and another 900,000 in 2011". When I contacted the NLC, I was told that the projections are basically unchanged, except that there's currently no end in sight. City finances typically take at least 18 months to recover after the rest of the economy. This is nothing short of a massive destruction of the US' social fabric, which the national media is barely reporting on.
If more attention were focused on state and local budget cuts, and their effects on people's lives, it seems inconceivable that we would have spent the last year distracted by a misdirected obsession with long-term deficits that are only made more problematic by the counter-productive policies pursued in the name of fighting them.
But the non-financial deficits we face are generally given even less attention. Indeed, they are rarely even named as such - or, for that matter, named at all. These include two physical deficits: the infrastructure deficit and the ecosystem deficit; three structural/functional deficits: the sustainability deficit, the time/jobs deficit and the equality deficit; two cognitive deficits: the critical thinking deficit and the imagination deficit; and one political deficit: the democracy deficit. We will consider them all in the next few weeks, because we ignore them at the peril of destroying civilisation as we know it.