Weeks of highly publicized debates -- some in Congress, more in the mass media -- brought Republicans and Democrats to a budget deal. To maximize public attention, they threatened a possible government shutdown. Both parties said that large government deficits and accumulated debt were "serious problems." They agreed that solving them required only spending cuts, not revenue increases. In unison, they repeated, "we" must "learn to live within our means."
In fact, both sides never actually engaged the deficit and the debt. They limited themselves to purely cosmetic, symbol-laden cuts (Republicans) and refusals to cut (Democrats). Aiming at the 2012 election, both parties used the deficit and budget debates purely to impress their voters.
Basic numbers tell the true story. The current (Fiscal Year 2011) budget spends about $3.5 trillion while receiving $2.0 trillion in tax revenues. The difference of $1.5 trillion (the equivalent of $1,500 billion) is this year's deficit. The US Treasury must borrow that from whoever will lend to the US government. After much hot air, Republicans and Democrats reached an "historic compromise," namely a spending cut of $38 billion. That will reduce this year's deficit from $1,500 billion to $1,462 billion, an economically insignificant sum. The sound and fury of Washington's debates signified nothing was to be done about the actual deficit.
Republicans pretend to be deeply troubled by huge government deficits run up in recent years. They conveniently forget why those deficits soared: (1) capitalism's crisis increased unemployment and so cut income tax receipts, and (2) Washington response was to borrow trillions and spend them on bailing out banks and credit and stock markets. Republicans revive their old mantra: reduce deficits by cutting "wasteful spending" and "government mismanagement," which turns out to mean the social programs they don't like. Republicans hope to cash in politically on popular upset over the crisis's costs and the government's unfair and ineffective response.
Democrats pretend to be as troubled by deficits as Republicans. They parrot Republicans in denouncing wasteful government spending and mismanagement. However, they champion fewer spending cuts than Republicans, hoping thereby to cash in politically on popular support for helpful government programs needed especially in hard times. Democrats are also loudly oppositional where that might appeal to their voters (e.g. saving Planned Parenthood from cuts).
Democrats and Republicans did not even discuss, let alone agree on, tax increases on the wealthy or on corporations as ways to cut deficits. At the same time, their proposals for cutting spending were economically insignificant. In short, the two parties' deficit-reduction campaigns were fakes.
What difference do deficits make? When the government's tax revenues fall short of its expenditures, it must borrow the difference. That borrowing adds to the country's total accumulated debt. As a result, next year and thereafter, government spending will have to pay interest on this year's borrowing. That means using a portion of its tax revenues in the future NOT to provide public services or help people but instead to pay interest on its borrowing this year.
Deficits matter because they divert tax revenues away from serving most taxpayers to enriching Washington's creditors instead. They also matter when Republicans and conservative Democrats use deficits and government debts as excuses to cut government programs they oppose.
Conservatives fear and oppose government economic interventions other than those that support and protect business interests. When most recessions hit, conservatives want tax cuts for business and little more. When major recessions hit, they want massive government bailouts of businesses. If those require deficits, the conservatives support them (they backed the Bush and Obama bailouts from 2008 to 2010). They only turn against deficits later, once business profits are restored, and then demand cutting government economic interventions that benefit other-than-business interests.
Liberals and Keynesians usually favor government deficits during recessions. They want the government to spend not only to soften hardships during economic downturns, but also to compensate for businesses' hesitancy to invest in poor economic conditions. Otherwise, liberals fear that crises may turn people against the capitalist system and/or to extremist politics. Thus Paul Krugman angrily urges Obama to increase rather than limit government spending and not worry about deficits. In such enthusiasms, liberals and Keynesians underestimate the real costs of deficits and who will likely have to pay for them.
The problems with these liberals' logic are many. First, if the government taxed corporations and the wealthiest individuals more, it could maintain high spending without having to incur huge deficits. One recent calculation showed that if corporations and individuals earning over $1,000,000 per year paid the same rate of taxes today as they paid in 1961, the US Treasury would collect an addition $716 billion per year. That would cut the 2011 deficit by half and likewise its interest costs. Second, consider who lends to the US government. Major creditors include the People's Republic of China, Japan, large corporations and wealthy individuals in the US and abroad. The greater our deficits, the more of everyone's taxes go to pay interest to those creditors. Third, consider the basic injustice of deficits: (1) Washington taxes corporations and the rich far less than it used to in, say, the 1960s; (2) Washington therefore runs a deficit; and (3) the US Treasury then borrows from corporations and the rich the money that the government allowed them not to pay in taxes.
The bottom line: US capitalism collapsed into dependence on massive government support in 2008 and since. Beyond providing immense, open-ended guarantees for the debts of defunct banks, insurance companies, etc., government support to business included trillions spent on bank and corporate bailouts. The government chose to pay for most of that by massive borrowing (rather than raising taxes on corporations and the rich -- not even on those corporations that government funds saved from certain bankruptcy). That is why those huge bailouts required correspondingly huge deficits.
On April 13, Obama suggested a small tax increase on rich individuals (raising the top bracket from 35 to 39% compared to the 91% it was in the 1960s) and an end to certain corporate tax loopholes. If ever enacted into law, those suggestions together would not change much. They would yield less than $100 billion per year. That would cut this year's deficit, for example, by a mere 7.5%. Moreover, more "historic compromises" with Republicans will only further reduce (or eliminate) even these modest tax burdens on corporations and the rich.
Both parties in Washington have sustained massive ongoing deficits supporting a crippled, state-dependent capitalism. Those deficits will continue to raise our national debt and continue to be used as excuses for cutting government services to people. Fake debates around deficits should not distract us from what capitalism has demanded and obtained from both of its parties or from the urgent need to build a real opposition to them both.