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By Steve Levy

Debt debate delusions: An economist shakes his head at budget mess

Uploaded: Aug 15, 2011

I have lived in Palo Alto for nearly 50 years studying economics and working as an economist. I have lived here through the recession after the Vietnam War ended, the recession after oil prices surged in 1974, the recessions in the early 1980s after interest rates skyrocketed, the recession in 1990 after defense spending was cut, the recession in 2001 after the bust and the recession in 2008 after the housing market crash. After all of these recessions Republicans and Democrats disagreed about the mix of policies to spur economic recovery but these disagreements were at the edge of a core set of agreements about fighting recessions.

Four of these basic agreements have been almost completely uncontroversial. One, the federal government has the tools and responsibility to support economic recovery after a recession. Two, lowering interest rates in the short term provides some incentive for businesses and consumers to spend and invest. Three, there are "automatic stabilizers" that mitigate the negative impact on spending -- taxes go down as incomes fall, safety net programs like unemployment insurance and food stamps get greater usage. Note that the result and intent of automatic stabilizers is to increase the deficit and reduce the amount of money taken out of the economy by a recession.

The fourth relatively uncontroversial recession-fighting-policy tool is temporary tax rate cuts. And, in fact, tax rate cuts were approved in 2008, 2009, 2010 and 2011 and, in addition, the so-called Bush tax cuts were extended through 2012. The fifth and more controversial policy tool is an increase in selected federal spending such as extending unemployment insurance benefits, building infrastructure and making grants to state and local government to support schools, public safety and health care. Increased federal spending programs were adopted in 2008 and again in 2009 and 2010.

Tax cuts and increased spending both increase the short-term federal deficit -- that is the point so money is added to the economy.

And then came the debt ceiling debate! Decades of negotiating differences in priorities for long-term economic growth within a framework of basic agreement about short-term recession-fighting went poof -- as if it had never happened. Instead of focusing on the need to support the economy and the broad areas of agreement, members of Congress focused almost entirely on the areas in which the parties do not agree. In the process they polluted our national dialogue, harmed the economy and did virtually nothing to seriously address long-term federal deficit challenges.

Both the President and Republicans managed to confuse the public about the timing of the deficit reduction and fighting recession -- economic recovery as a first priority and aggressive deficit reduction thereafter. President Obama, in arguing for repealing the Bush tax cuts as part of long-term deficit reduction, made it seem as if he wanted tax increases now, which he does not. Republicans, in arguing for their version of long-term deficit reduction, forgot that they were also arguing that the economy needed help and they had just the tax cuts to do the trick.

And both parties, in arguing their version of long-term deficit reduction, forgot to remind the public that you don't cut spending or raise taxes in the middle of an economic downturn. Running deficits, whether with just "automatic stabilizers" or active policies like tax cuts and spending, is what happens while we fight recessions. Whatever the long-term merits of tax and spending policies (a debate we postponed but still need to have), both spending cuts and tax increases to reduce the deficit are short-term "job killers" in fighting recessions.

And if you listened to last Sunday's news shows or read last week's Town Square posts, the S&P downgrade and worldwide stock market decline did nothing but escalate the rhetoric and finger pointing. In doing this we have moved further, not closer, from addressing the nation's economic and budget challenges and in getting the right sequence of public policy.

This week we learned that there are approximately 3 million job openings today in an economy with 14 million Americans out of work. Surely this is not the time to give up on economic recovery policy. And the public agrees overwhelmingly with most polls putting job growth first and deficit reduction a very distant second for today's agenda.

It is easy to point blame. I do not think both parties are equally to blame. But at this point, blame is not helpful. The Economist magazine, a free-market-oriented British weekly, echoes what I feel: "Worse, the poisonous politics of the past few weeks have created new sorts of uncertainty...At best the politicians will have slowed a sputtering expansion; at worst they will have killed off the recovery and inflicted lasting harm on the world's most impressive prosperity machine."

There are plenty of good ideas out there -- read Tom Friedman's columns this week from the New York Times or an op-ed by Jed Bush and Kevin Ward, a former Federal Reserve governor in Wednesday's Wall Street Journal. Surely amidst the agreement for tax reform (closing loopholes and lowering rates), infrastructure and education investment, immigration reform and support for public and private research and development, we can find a pro-growth agenda with majority agreement.

But can we find a public dialogue that allows this agreement to be developed? That is what I worry about. And can we find that level of public dialogue and civility within disagreements within Palo Alto as we face the challenges of maintaining a city that is a great place to live and work and a welcoming community?