Deficit Reduction: GOP and Democrats Agree, But Economists Do Not

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March 22, 2013; Source: Bloomberg

It would appear that Democrats and Republicans agree on the centrality of deficit reduction in the nation’s budget crisis, though they disagree on how to go about doing it. Nonprofits are affected by whatever the country does on the deficit, because spending cuts are in the offing. But some economists think the deficit is being overemphasized.

Writing for Bloomberg, David Lynch reports that economists are disputing the well known study by Carmen Reinhart and Kenneth Rogoff that says that “nations with debt loads greater than 90 percent of their economies grow more slowly.” The U.S. has a current debt of $16.7 trillion, which is 106 percent of the size of the economy, but the economy is now growing after a long period of stagnancy and decline.

Economist Guy LeBas suggests that the main problem isn’t debt, but weak economic conditions (which, in turn, encourage the nation to go deeper into debt). In other words, it isn’t a matter of the total debt level but the conditions that make the U.S. issue more debt. Lynch cites two French economists who assert that growth rates actually increase when the ratio of debt to GDP is higher than 115 percent.

The problem with the arguments against the Reinhart/Rogoff study is that the U.S. economy may be growing despite a debt-to-GDP percentage of 106 percent, but there is no way to know if the economy would or wouldn’t be growing faster if the ratio were 90 percent or less. Sen. John McCain’s (R-Ariz.) economic advisor, Douglas Holtz-Eakin, now head of the American Action Forum, contends that the debt level “has to be hurting us right now.” On “Morning Joe,” Holtz-Eakin basically relied on the Reinhart/Rogoff analysis to explain his position. He contended that “spending is the problem,” dismissing any issue that might be associated with revenues. Countering Holtz-Eakin and Reinhart/Rogoff, Dean Baker, the co-director of the Center for Economic and Policy Research, described the notion that debt limits growth as “very silly.”

Either way, both Democratic and Republican politicians seem to believe in and act upon the notion of a tipping point on the debt level. They’ve bought into the frame of deficit-reduction as core to tax reform and budget negotiations, with spending cuts as an almost unavoidable part of the calculus. Do nonprofits agree? Or, if nonprofits agree with the analysis suggested by economists such as Baker and Robert Greenstein of the Center for Budget and Policy Priorities, so what? Are nonprofits that think the emphasis on deficit reduction is misguided going to do anything about it? —Rick Cohen