Create jobs, lower the deficit

Soon after the monthly job totals were released, Atrios mentioned in passing, “If anyone actually does care about the deficit, more jobs would help that too.”

This is important, and it too often goes unsaid. Given the larger economic circumstances, the country basically has a choice: focus on growing the economy and creating jobs, or focus on deficit reduction. Tackling one problem generally means making the other problem worse — creating jobs means investing a lot of money; reducing the deficit means taking money out of the economy.

Conservative economic theory argues that we can address both problems at once: if we address the budget shortfall, the confidence fairy will sprinkle confidence dust on employers, magically reducing unemployment.

Reality shows that’s backwards. Indeed, the one sure-fire way to improve the nation’s fiscal conditions is to also improve the nation’s economic condition. As David Leonhardt explained several months ago, economic growth lowers the deficit.

We look back on the late 1990s as a rare time when the federal government ran budget surpluses. We tend to forget that those surpluses came as a surprise to almost everybody.

As late as 1998, the Congressional Budget Office was predicting a deficit for 1999. In fact, Washington ran its biggest surplus in five decades.

What happened? Above all, economic growth. And that may be a big part of the answer to our current problems.

Yes, the government became more fiscally conservative in the 1990s. Both President George H. W. Bush (who doesn’t get enough credit) and President Bill Clinton, working with Congress, raised taxes to attack the 1980s deficits.

But those tax increases were the second most important reason for the surpluses that followed. The most important was the fact that the economy grew more rapidly than expected. The faster growth pushed up incomes and caused more tax revenue to flow into the Treasury.

Given the size of the current deficit, growth almost certainly won’t be enough to balance the budget anytime soon, even if the economy grows much faster than expected, which seems unlikely. But growth was responsible for reducing the deficit in 2009, and more growth would mean more jobs, more jobs would mean more revenue, and more revenue would mean a smaller deficit.

Indeed, perhaps the most astounding aspect of Republican rhetoric on the economy lately is how contradictory it is. On the one hand, a top GOP goal is, at least in theory, deficit reduction. On the other hand, those same Republicans want more tax cuts (which makes the deficit worse), and spending cuts that would likely slow the economy (which also makes the deficit worse).

Digby added a while back, “Why Democrats haven’t been saying ‘jobs=deficit reduction’ on a loop, I don’t know. I guess they figure it’s just too complicated to explain that when people aren’t working they aren’t paying taxes so the government doesn’t have as much money.”

I’m guessing the same thing. It’s easier to talk about “belt tightening” during a downturn than it is to explain how economic growth leads to revenues leads to deficit reduction.

But for those who take reality seriously, it’s worth remembering anyway.