This week has delivered two economic surprises that illustrate the right way and the wrong way to respond to the worst economic disaster since the Great Depression.
First, the euro zone economy shrank more than expected in the past three months, moving France back into a recession. That's what happens when you implement an austerity policy that serves to undermine economic demand.
Second, the Congressional Budget Office slashed its forecast of the U.S. deficit by 24 percent, and now projects the lowest deficit this year in four years. That's what happens when fiscal and monetary stimulus helps get an economy back on track, growth picks up, and the tax revenues start rolling in.
For years, innumerable economists have been saying that anyone concerned about the deficit should focus on stimulating economic growth, at which point the deficit problem would largely disappear. Those voices have been vindicated by the CBO's new numbers, which project that the deficit will fall to just over 2 percent of GDP by 2015, a level widely considered manageable.
Of course, though, this is hardly a triumphant moment for progressive economics. One can only imagine what might have been: What if Congress has passed a much larger stimulus in 2009 and better structured that stimulus to focus on spending with the biggest bang for the buck, particularly infrastructure investments? What if Congress had followed up with a second round of stimulus, as President Obama proposed in 2011 with his American Jobs Act?
We would certainly be a better place today, with the economy stronger and the deficit on an even steeper downward trajectory. Bigger spending yesterday would have meant less borrowing today.
The incredible shrinking deficit—thanks mainly to tax receipts, not sequester cuts—also underscores the terrible choices made by Congress for achieving fiscal stability. The deficit is in a nosedive right now even as low-income people are losing housing, healthcare, job training, and other vital services due to budget cuts that don't make much of a difference in the grander scheme of things, compared to rising tax receipts.
Imagine an alternative history, whereby Congress had agreed to President Obama's request at the end of 2010 to roll back the Bush tax cuts just for Americans making over $200,000—a step that most economists said at the time would have little effect on growth. If that had happened -- instead of waiting another two years and agreeing on a $400,000 threshold -- the deficit would have started falling earlier and would be even lower today. The disastrous sequester cuts could have been avoided altogether.
One last point: Even with the improved numbers, the U.S. is still on track to borrow $6.9 trillion in the next decade, which will mean spending hundreds a billions of dollars on interest payments a year for as far as the eye can see. That's not a good thing, and the only reason the U.S. will be borrowing so much money is because we refuse to raise the revenues needed to pay for government activities backed by a large majority of Americans.
The speed with which rising tax receipts in a strong economy can bring down deficits—as we saw most dramatically in the late 1990s—underscores how voluntary America's deficits really are. As the economy improves, the U.S. could easily raise taxes back to where they were under Clinton and, without more spending cuts, watch deficits shrink to negligible levels. Instead, our politicians—mainly the Republicans, but also many Democrats—would rather keep taxes at historic low levels for most households, inflict needless cuts, and pass along huge new debts to younger Americans. That's wrong.