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The US Fiscal Deficit: Scare Stories vs. Reality

Robert Pollin: There are ways to cut the deficit without freezing social spending

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PAUL JAY, SENIOR EDITOR, TRNN: Welcome to The Real News Network. I’m Paul Jay. Joining us now to talk about President Obama’s State of the Union speech and the state of the economy is Bob Pollin. Thanks for joining us, Bob.

PROF. ROBERT POLLIN, POLITICAL ECONOMY RESEARCH INSTITUTE: Thank you for having me.

JAY: So Bob is the cofounder of the PERI institute, based in Amherst, Massachusetts.

JAY: So you wrote an article recently, and in it you quote New York Times and Bloomberg and their reactions, echoes much of what’s happening in the mainstream press in discussing the stimulus program. Is the United States government facing fiscal suicide asks The New York Times. Are US Treasury bonds headed for the dumpster asked Bloomberg. It seems like legitimate questions if this stimulus money just keeps getting spent.

POLLIN: They’re wrong. It doesn’t bear any resemblance to reality if we go through things carefully. The stimulus money that was spent has driven up the deficit. The deficit, at 11 and 12 percent of GDP, is as big as it’s been since World War II, but it was needed because Wall Street destroyed the economy, and we were heading for the Great Depression

JAY: Well, drill into some of the numbers, because you can’t just keep spending money in the sense of where’s the money coming from. I mean, to what extent is—. And the question, too, is to what extent is this debt, and to what extent is it just printing money?

POLLIN: It is debt, but the interest rate at which the government is paying is extremely low. Right now a five-year Treasury bond is at 2.5 percent. Even a year, you know, eight months ago it was lower—2.1 percent. Now, compare that under Reagan, when he borrowed money, it was at 13 percent—a five-year Treasury bond was at 13 percent. That’s a difference—in terms of annual debt payments on the money we borrow now, that’s a $200 billion difference. And so, you know, the key point for debt is not just the one big number but what’s the burden that you have to carry forward. And the burden carrying it forward, it’s there, but it is far less than one would suspect, precisely because the interest rates are so low.

JAY: Now, one of the arguments some of the people that are concerned about the debt crisis are making is that this isn’t just about that; it’s also about printing of money. And how much of the stimulus and overall funneling of money from the Fed to the banks on Wall Street is just printing money? In which case, at some point does that become inflationary, and then you’re not paying 2-point-something percent, you start inching up into kind of Reagan-style interest rates?

POLLIN: So far there’s no inflationary pressure. At 10 percent unemployment you don’t get inflationary pressure, because workers can’t demand wage increases. The other source of inflationary pressure is if oil prices dropped. And oil prices can’t rise now, because the demand is low. The notion that just printing money is itself going to cause inflation doesn’t really happen until you get to, you know, the massive hyperinflations of, like, Germany in the ’20s.

JAY: Well, one of the unknowns in this situation is the issue of oil prices, and that’s sometimes connected to just geopolitics, not demand.

POLLIN: Right.

JAY: I mean, what if something happens with Iran, for example, or something in the Middle East that does this big spike in oil prices? Does that throw all these calculations up in the air?

POLLIN: We did have a spike two years ago, and the prices came right back down. So I don’t think in a depressed economy we’re likely to have a spike. But let’s say we do. I think there’s two things that we can do that we should have done in the late 1970s, which is, number one, we can draw on our strategic oil reserves and we can put out as much as we want. The government can buy oil—it should be buying oil now, when it’s cheap, and then, when the prices start to spike, we can counteract any upward price pressure by releasing all the strategic reserves. And number two—as happened when we spiked two years ago—is that we increased energy conservation. So if we’re investing now, which we should be doing, in energy conservation measures—that also will weaken the effects of any upward price pressure, because people become less reliant on oil.

JAY: Now, in your article you say there is a point where the spending of stimulus money can bring into question the quality or trustworthiness of the US dollar. And the issue of too much deficit, there’s a point where there is too much deficit.

POLLIN: Yeah.

JAY: So two things. Where is that point? And then, what does one do not to get there?

POLLIN: Well, you know, we’re at a 10 percent, 11 percent deficit, so, you know, $1 trillion. You know, that’s a lot of money. Well, we know we’re at a danger point, really, is when the interest rates start to rise significantly, because that suggests that all the people that have money to lend don’t want to purchase US government Treasuries. So far, there is, you know, some slight movement upward in interest rates. But, still, there’s really not much action. Now, that said, there are some things, important things that we can do to get more money back into the Treasury and to cut spending. Number one, we can cut military spending. Obama, in his speech the other night and throughout his campaign, said he’s ending the war in Iraq, and he said—when he went into Afghanistan this year, he said that it’s a one-year operation. Okay, let’s say that’s true. Let’s hold him to his word. Those two wars are costing $200 billion.

JAY: Of course, there’s no suggestion from him that that will ever mean a reduction in the military budget.

POLLIN: Well, fair enough. But, I mean, in the year 2000, before 9/11, the military budget was about 3 percent of GDP, and right now it’s at about 4.5 percent. If Obama did what he said with Iraq and Afghanistan and just cut that money out, took the $200 billion out, we would return to a level of defense spending equivalent to what it was in 2000, to before 9/11.

JAY: Okay, but not—we’ll see whether that really happens now, ’cause there’s a major question mark there.

POLLIN: Yeah.

JAY: Now, the other thing, you talked about three areas in your article that needed to be done not to get into fiscal hell—my words, I think, not yours—but one was cut back on military spending. The other was get health-care spending under control, and that seems to be out the window.

POLLIN: The thing is, there is so much waste in that system, as we all know, the US spends twice as much per person on average than the rest of Western Europe and Canada on health care. So that and the US’s budget, not the entire spending, but public spending, is in the range of $800 billion. So I’m not saying we should get it down to, you know, a Canadian level, where would be, say, $400 or $300, but even if you took $100 billion out, which, you know, after a year of talking about it, to be able to get $100 billion out in the waste that we call our health-care system is not really a stretch. And so—.

JAY: Except where is the politics to do it? Because they were making the argument [that] to do that you need a public option.

POLLIN: Yeah.

JAY: Public option seems to be gone, and most are going to have a kind of more regulated insurance business with, maybe, you know, not preventing people who have serious illness from getting insurance, but especially if they force everybody into insurance now, without any—.

POLLIN: Yeah, and subsidize poor people.

JAY: Yeah wind up costing more, not less. And made a deal with PhRMA where they’re not going to really have any serious cuts on the pharmaceutical costs.

POLLIN: Like the military, it’s not a huge stretch to think that we could at least get $100 billion out of government spending in health care without people suffering at all in terms of their wellbeing. And that was the second one. And the third one is we’ve got to tax Wall Street. And that actually is—you know, there’s two bills, one before the House, one before the Senate. It seems to have a lot of support.

JAY: But small, small amounts of money, in the scheme of things.

POLLIN: No. I mean, the proposal that’s out there would generate over $100 billion, which is less than—I mean, myself and Dean Baker proposed something that would generate about $180 billion. But we’re still at somewhere where it could get in the range of $100 billion through a very tiny tax: it’s a 0.25 percent on a stock trade, every stock trade, which is on a $100 trade you pay a quarter, and then for bonds, derivatives, you pay even less. You still—and you assume that trading is cut by 50 percent.

No, but it is something that Senator Harkin has got a bill in the Senate, and DeFazio, Peter DeFazio, in the House has a bill. And the numbers that I’m talking about are their numbers that—you know, but that would still generate in the range of $100 billion.

JAY: So we get to what? Two, three, four, five, $600 billion if we put these pieces together? But a lot of big "ifs" connect to each one of these billions, and the deficit is growing by how much per year over the next few years?

POLLIN: Well, the deficit is, you know, $1.1 trillion now. But, you know, if the economy recovers, then people have jobs—they’re paying taxes as opposed to getting unemployment insurance or getting food stamps. And so economic growth itself will take care of, you know, the other mere $500-$600 billion.

JAY: A major "if".

POLLIN: Yeah.

JAY: You want to get from about 10 percent unemployment down to about 5 percent unemployment.

POLLIN: Yeah.

JAY: So in the next segment of our interview, let’s talk about how do we get from 10 percent unemployment to 5 percent unemployment, and can that be done just with stimulus.

POLLIN: Yeah.

JAY: Please join us for the next segment of our interview with Bob Pollin.