Opposing Goals: Budget Deficit Reduction vs. Expanding the Economy

Reading news about reducing the federal deficit may leave you thinking this is a black and white issue. But the budget is part of the economy. Whatever is taken from the budget ultimately comes out of the larger economy. To further complicate the issue, we are setting up opposing goals. One goal is to grow the economy out of recession. The other goal is to tackle the deficit with a plan that will shrink the economy. It seems at least one goal is doomed to failure. If you look at my earlier post on the Great Depression, you see the lesson of history; the recovery will be jeopardized.

The House deficit reduction proposal is now $6T over ten years. This means shrinking the economy $600B every year for ten years. Further, the House budget targets domestic spending. This will mean federal lay offs. This will in turn mean other layoffs as the economy shrinks. Further, money for programs which would have been spent in the economy will also be gone. We don't know the harm that will be done by taking money from education, our seniors, etc. We really don't know what the ripple effect will be to shrink the economy $600B per year.


The House budget does reduce taxes to stimulate the economy. But can we really expect business to both pick up the slack of $600B a year for ten years and also expand while the economy shrinks in order to take advantage of tax breaks? Even if a business wants to expand, how likely is a bank to make a loan during a down economy? This is wishful thinking.

The President's budget may possibly work. According to his plan, the deficit will be reduced $4T over 12 years ($300B per year). Already this is a smaller hit on the economy by half. Further, $1T will be saved by lowering interest payments. Another $1T is made up for by increasing revenue by eliminating the Bush era tax cuts. Now we're down to a $150B annual hit on the economy. What works for me is federal layoffs are reduced. Layoffs may even be eliminated since the social engineering of the House budget is not in the President's budget.

To my mind this is more palatable. It will still shrink the economy but might be manageable. We might still get through the crisis without seriously damaging the recovery. The matter of a fine point is I have been unable to find these budgets. At this time, I can only write about what I can find in the media.