Simpson and Bowles, “spending problem” voodoo economics ignores the lack of “crowding out”

Alan Simpson and Erskine Bowles – co-founders of the corporate lobby Campaign to Fix the Debt – were on Meet the Press this morning. I couldn’t drag myself to watch it because I am sick and tired of hearing every oligarch’s favorite lackeys argue that the national debt is a reason to gut the welfare state. Which is exactly what they were doing this morning:

“Yes, the president has taken some steps forward on the entitlement programs, but has he done enough? Absolutely not,” Bowles said.

But they and their disciples couldn’t be more wrong. The U.S. government has no “spending problem” from a macroeconomist’s point of view. Of course, the country can’t indefinitely continue to borrow more than it earns, but the idea that we must somehow tackle debt by cutting spending — and do it right now — is voodoo economics of the highest order.

For spending to be an immediate problem, it would have to be problematic. And the primary reason that government spending is problematic is due to “the crowding out effect.”

I could find some haughty economist to quote on the issue, but for simplicity’s sake here’s Wikipedia:

“…crowding out is a phenomenon occurring when expansionary fiscal policy causes interest rates to rise, thereby reducing investment spending.”

Yet interest rates are rock bottom and aren’t expected to rise anytime soon, and demand for U.S. Treasury bonds remains high.

Thus, government spending appears to be having no averse effect on financial markets, which, according to Treasury yields, actually seem to think that lending the U.S. government money is a wise idea. The debt “crisis” is only caused by a “spending problem” when one considers government spending to be an issue from an ideological standpoint.

If Simpson and Bowles were serious about tackling the debt without completely undermining the economy, they’d advocate higher taxes on those that can afford to pay more. Corporations are awash with cash, and capital is taking a larger slice of the pie than ever. But aggregate demand is lagging, and to undermine social safety nets would further weaken it. Sound economic policy would, therefore, have the rich finance deficit reduction — if it must be done in this fragile economy.

Samuel Knight

Samuel Knight is a freelance journalist living in DC and a former intern at the Washington Monthly.